Black swans and fat-tails on the beaches of AC

A black swan event, or as the scientist Stephen Gould calls it punctuated equilibrium, can be of catastrophic proportions – like the 1883 volcano that blasted the small island of Krakatoa into tiny pieces, or the earthquake in the Indian Ocean in 2004.  That earthquake caused a tsunami that hit Sumatra and killed over 200,000 people. Over the course of the history of the planet there have been much larger volcanic eruptions, earthquakes and tsunamis, but there have also been thousands and thousands of smaller events that created major shifts in the living conditions in the area where they occurred; and some are just social occurrences, impacting on human society and have no natural disaster component to them at all.

Take Atlantic City, New Jersey for example. For the last 28 months gaming revenue from Atlantic City casinos has been declining.  First, it is declining because of the legislation that prohibits smoking on a casino floor (it has since been amended to allow for smoking on 25 percent of the casino floor), next, like the rest of the country, Atlantic is feeling the effects of the economic downturn as people have less money to spend then they did 4 years ago and less confidence is spending it; finally, and most significantly, Atlantic City is losing business to casinos in other states, primarily Pennsylvania.

In response to the situation, the governor and the legislature have come up with some strategies to help the struggling casino industry – and its attendant tax contributions to state and city coffers – compete against the Pennsylvania casinos.  The governor wants to create a special casino district in the city to be administered solely by the state, additionally the legislature has authorized smaller hotel-casino complexes to be built and has also introduced a new regulatory structure that is intended to be less expensive and more flexible.  In 1976 when the debate over allowing casinos to be built in Altantic City was in full bloom Nevada was the only jurisdiction in the United States that permitted casinos.  Very few states even had a lottery, except for some legal poker rooms and a few race tracks gambling was pretty much limited to the Nevada desert.

But the good people of New Jersey wanted to return to Atlantic City to its former glory and thus voted to to become the second state to allow casinos.  At the time, everyone was sure of one thing, they wanted gambling, but not “Nevada style” gambling, a pejorative term, further they certainly wanted to keep organized crime out .  So they carefully crafted regulations to regulate every facet of casino operations, including dictating the ratio between slot machines and table games, the number of supervisors the table games were required and what percentage of the total slot machines could be of one manufacturer – regulation also specified the minimum number of hotel rooms, public space and most everything else except the color of the carpet.

The rules worked to the satisfaction of the regulators, but rarely the operators; they limited the growth of the industry and the amount of money people were willing to invest in an Atlantic City casino.  Still, the casinos were successful, but over time competition developed around the region, from race tracks with slot machines, from Indian casinos and finally from Pennsylvania slot parlors that have since added table games.  Prior to legalized slot machines in Pennsylvania between 50 and 60 percent of gamblers in Atlantic City came from Pennsylvania, now those gamblers home in Pennsylvania and gamble.

No one could have foreseen in 1975, or 1985 or even in 1995 the extent of casino expansion in the United States.  So, it is difficult to blame the people  who designed a system for no competition when it fails, no competition could be foreseen.  And there it is the black swan, dropping out of the sky to pluck the profits from New Jersey and spread them around in Pennsylvania, New York, Connecticut, Delaware, Maryland, Maine and so on and so forth.  Granted 200,000 people did not die, but thus far 20,000 jobs have died and that for those in the wake of this big wave that is also very painful.  There is a concept in math called a fat-tail often applied to economics that could also be used as the metaphor – it is the thing that is outside a normal distribution curve and by normal methods of forecasting – it is, if not impossible, totally improbable – you know like going from no gambling anywhere in the country except Nevada to legalized gambling in all but two states in 50 years.


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January 2011
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