I’m at a Loss about Loss RebatesBy Eliot Jacobson, Ph.D.March 16, 2016 at 3:16 pmA short time back, I was contacted by a casino interested in offering a high rolling blackjack player a 30% cash rebate on losses he had incurred. The player apparently made this demand to the casino, saying he would not play again unless he was given this rebate. Management was trying to understand the mathematics behind DOLs before making their decision. Good for them. Unfortunately, a 30% rebate was so much higher than anything I had seen before at a table game, I fear that my overreaction may have come off as arrogance instead of well-intended advice. After our brief discussion, I haven’t heard back from them.A discount on loss (DOL) is a cash-incentive that is awarded as a cash reimbursement to a premium player who suffered a significant loss during a trip. Simply put, the losing player is refunded a fixed percentage of his losses. DOLs have become commonplace in the premium player market. As such, premium players consider DOLs to be a normal and expected cash comp for any play they extend to a casino. At casinos big and small, DOLs have infected financially sound player reinvestment strategies with the illusion of profitability. The fallacy of DOLs is the belief that beating a player is the same as earning income from that player. A comparison with other marketing programs exposes this conceptual flaw.In slots, for example, players accumulate points in proportion to the total volume of their play. Point accumulation is directly proportional to the theoretical win (t-win) the casino earns from slot players. In turn, players are given a fixed percentage of their points to use for comps. The overall reinvestment in a player can be measured against the t-win the casino has earned from the player. If the player’s t-win exceeds the total reinvestment costs, then the casino has earned income from the player, regardless of what actually happened.Many casinos have extended their points programs to cover their table games as well. By using points, tier players on all casino games are given cash and comps based on t-win the casino has earned from the player. The casino does not care if a given player wins or loses. Player ratings correspond to t-win, which is how casinos correctly measure how much they have earned from a player.Likewise, non-negotiable chip programs in baccarat award cash to players in a manner that is directly proportional to the t-win the player has generated. Internationally, non-negotiable chip programs are the currency of premium player reinvestment. Casinos don’t differentiate winners from losers when giving non-negotiable chip rebates. The rebate a player is given is based on how much the casino has earned from the player, as measured by their t-win.For DOL programs, there is only minimal correlation between the cash the player may be awarded and the t-win the player has generated. Indeed, in a DOL program, winning players are awarded nothing for the t-win they generate. By contrast, losing players are often overcompensated to the extent that the amount of their DOL easily exceeds the t-win the player has generated. Winners are punished for winning and losers are over-compensated for their losses. Without sounding too political, that last sentence almost sounds like a campaign slogan. But it’s a simple truth for DOL programs.The key to exploiting DOL programs is to focus on the over-compensation of losses. Even if they are not advantage players, many high-value players understand how to get the most from their DOL programs. After just a few trips, an effective strategy becomes intuitively obvious. They play short sessions, generating very little t-win, while milking the maximum from their DOLs and other trip incentives.One now infamous DOL abuser was Donald Johnson, who in 2011 and 2012 beat three Atlantic City casinos out of more than 15 million dollars by exploiting the DOL programs he negotiated. Another extreme example was the Revel Casino 100% loss rebate program offered in 2013, just a few months before the casino went bankrupt. Targeted towards high-rollers, Revel was offering up to a $100,000 loss rebate. As word of Revel’s intended DOL giveaway spread throughout Internet message boards, last minute changes were allegedly put in place to avert a marketing catastrophe. A simple Google search provides many other examples. DOL programs are ubiquitous in today’s competitive casino environment.The basics of exploiting DOL incentives are easy to understand. For example, Don Johnson negotiated a deal where if he lost $500K in a single day playing blackjack then he could stop playing and receive a 20% discount on his losses, if any. Additionally, Johnson negotiated a maximum bet of $100K. Johnson was effectively playing with a stack of 5 chips. In blackjack over a very short period of play, the game is nearly break-even. If Johnson simply stopped after either winning 5 chips or losing 5 chips then, roughly speaking, half the days he would walk away a winner of $500K and the other half of the days he would walk away losing $400K (after his 20% rebate). This amounts to a theoretical net win of $50K per day.The key ingredients that made Johnson’s method of exploiting DOLs profitable are:The ability to play short-stacked.The right to claim a DOL without a reasonable period of required play.Receiving a large DOL percentage on losses.Playing a game with low house edge and high volatility.The most vulnerable game, by far, for DOL exploitation is craps. There is essentially no way for a casino to offer a financially sound DOL program at craps. Any craps player who is given a DOL can easily beat the casino outright. Blackjack comes in a strong second.The easy way to see if a player is beating his DOL incentive is simply to compute the player’s total t-win, add up the total cash he has been given, and compare his t-win to his cash compensation. Upside down is upside down, regardless of the player’s actual results. That’s the simple mathematical truth behind DOLs. Winning is not the same as earning. A casino’s profitability is measured in t-win, not actual win. The bell curve has two sides to it. If a player wins, he gets to keep 100% of his winnings, he does not have to give a “win-rebate” back to the casino.If I had my way, I’d do away with DOLs. While their original purpose was to encourage the quick repayment of a player’s line of credit after a significant loss, they have morphed into a marketing monster. Players in many jurisdictions internationally do just fine without DOLs. Domestically, points programs are completely satisfactory for tier players. From a marketing perspective, DOLs turn many potentially valuable players into dubiously profitable aggravations. Premium players have figured out how to game system while casinos encourage them to demand even more.If Johnson could crush Atlantic City with a 20% rebate, you can imagine my reaction to the 30% DOL I was asked to consider. It is almost impossible to conceive of a circumstance where a player would be profitable in the long run if he got started down that road. Maybe the casino could constrain their generosity towards this player, but the truth is that it would be extraordinarily difficult to not give this high roller his 30% rebate going forward. Personally, I’d rather have a $3 slot player than a premium blackjack player with a 30% DOL.