From Harvard Economist To Casino CEO : Planet Money Gary Loveman likes to say there are three things that can get you fired from Caesars: Stealing, sexual harassment and running an experiment without a control group.

From Harvard Economist To Casino CEO

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(SOUNDBITE OF ARCHIVED RECORDING)

FRANCO PAVONCELLO: I believe that there is a lot of goodwill across all parties to allow Mr. Monti to do something in the next months to try and solve this situation.

(SOUNDBITE OF SONG, "DANCE FLOOR")

THE APPLES IN STEREO: (Singing) I want to peel back. I want to feel that, that my future's still coming. I walk into the night, aim for the city lights, but my mind is still running. I can see your face again...

ALEX BLUMBERG, HOST:

Hello and welcome to PLANET MONEY. I'm Alex Blumberg.

JACOB GOLDSTEIN, HOST:

And I'm Jacob Goldstein. Today's Tuesday, November 15. And that was political analyst Franco Pavoncello you heard at the top. He was talking about the new prime minister of Italy.

BLUMBERG: Today on the program - the economics of gambling. We have a fascinating conversation with a former Harvard professor who is now the CEO of Caesars Entertainment, the giant gambling and entertainment conglomerate. And we're going to talk about what the world of gambling looks like when you put an economist in charge. That's all coming up, but first, of course, the indicator with you, Jacob Goldstein.

GOLDSTEIN: Today's PLANET MONEY indicator - 7.2. Retail sales in the United States rose by 7.2 percent over the past year. Retail sales, they've actually been rising pretty steadily for several months now. And that continued in October. That's according to numbers the government released just this morning. And you look through this report, and you see people buying more of lots of different things - more cars, more electronics, people are doing more online shopping.

BLUMBERG: So is this the fabled good-news indicator from Jacob Goldstein that we've heard so much about, like - that you cite once every four years?

GOLDSTEIN: It is. And Alex, if you had listened to Friday's podcast, which obviously you have...

BLUMBERG: (Laughter).

GOLDSTEIN: ...Not yet, you would've heard that there was another good-news PLANET MONEY indicator. On Friday, I talked about how exports are actually at a record high for the U.S. So, you know, exporting more stuff, getting more money coming into the country, buying more stuff - this is, indeed, all good news. You know, now obviously if we could just fix housing and add a few million jobs and solve the European debt crisis, we'd be in great shape.

BLUMBERG: There we go. All right. So (laughter)...

GOLDSTEIN: Couldn't help myself.

BLUMBERG: OK. Thanks, Jacob. And you're sticking around 'cause we're hosting the podcast together. And the idea for today's podcast actually came from an item that you read in - what was the publication again?

GOLDSTEIN: It's actually called Tech Review, which is this sort of nerdy but good publication that MIT puts out. And they had a Q&A with this guy who's the head of Caesars. And I'm actually going to read you the part that's right at the top of the Q&A - just what they wrote that grabbed me. It said Gary Loveman, the CEO of Caesars Entertainment, says there are three ways to get fired from the hotel and casino company - theft, sexual harassment and running an experiment without a control group.

BLUMBERG: Right. And it's the third item that caught your eye.

GOLDSTEIN: Yeah. Definitely. That is the PLANET MONEY item. So Alex, you and I called him. And the first thing we asked him was, did you really say that thing about getting fired for not having a control group?

GARY LOVEMAN: I've said that several times.

BLUMBERG: And so on the podcast today - our conversation with Gary Loveman, we're going to talk about what experiments he runs as the CEO of Caesars. But before we move on here, I just want to get this out of the way and acknowledge that casinos are a charged topic. And there's lots to discuss. For our purposes today, we're talking about casinos as a business. They are a business like any other.

And you can decide for yourself whether you like what they're selling or not. And a lot of people do like what they're selling, which is basically you get to stand or sit in a room and play games of chance that you're probably not going to win. And that's what most people are buying when they go to a casino. The question we had for Loveman is, how do you best run that business, and what does running controlled experiments have to do with running the business well?

GOLDSTEIN: And he talked us through lots of different examples, some of which have to do with gambling, some of which actually don't. I mean, one example, in the restaurants at these casinos, they don't make much profit on the food itself, like at most restaurants. They really make their money when people order drinks and desserts. So they want to figure out the best way to get waiters to sell more drinks and desserts.

BLUMBERG: And so they measure each server and offer bonuses to those servers when their tables order a lot of drinks or desserts, but - and here's where the testing comes in - what size bonus, what kind of incentive should you offer?

LOVEMAN: Too small an incentive will not motivate the waiter to go much out of their way to do the work. Too large an incentive makes the waiter obnoxious.

GOLDSTEIN: (Laughter).

LOVEMAN: So now the waiter has you pinned at the table, and he won't let you get up, or he won't give you your check until you buy the dessert. So neither of these are appealing alternatives. Something in the middle that's meaningful but not over the top is the right way to get that accomplished.

BLUMBERG: And to find that meaningful middle, you run lots of experiments with lots of controls. And it might be clear. Gary Loveman did not start life as a CEO. In fact, he never in his wildest dreams thought he'd ever be the CEO of anything. He was a Harvard economist teaching at the business school, but he got this side gig sort of early on in his career to teach a private course - sort of moonlighting - at this private company out in Vegas.

GOLDSTEIN: And the students in this course, they were hotel managers, restaurant managers, casino managers.

LOVEMAN: Each day in the course, there were several seats that were empty. And it was always the same ones. And I went to find the people who were not coming to the classes. And they were the guys that managed the casinos. So I asked them one evening in the lounge, why it was that they never bothered to come to the classes even though they were clearly in the building? And they told me that there really wasn't much they could learn from me that was of any use to them. And that struck me as odd given that this is a very sophisticated, highly quantitative business. And yet, there was just no interest in advancing their thinking about this. It was clear that this was quite an insular industry - a bunch of people that had grown up in it in Nevada and New Jersey. And it struck me - there was a lot of opportunity to do more with this business than people were doing at the time.

GOLDSTEIN: And so Loveman in talking about this in his very wonky way, he said this looked to him like an opportunity for intellectual arbitrage, by which he meant, you know, take all of his expertise in how to analyze data and increase profits and apply that to this industry where no one wanted this expertise. He basically figured a guy like him could help a company make a killing.

BLUMBERG: And today, he is the CEO of one of the largest gambling companies out there. So it seems he was right. And even though he's the CEO now, he still runs his company a lot like an economist - doing experiments on almost every single business decision the company makes. And he told us a lot of those experiments revolve around this one question - how do we get customers to come into our casino?

GOLDSTEIN: And one basic approach that lots of casinos use is they make all these free offers to people. You know, we'll give you - whatever - a hundred dollars in free chips to play if you come into our casino. But you want to make sure that you offer this enticement to the right kind of person. You don't want to send a hundred dollars in free chips to somebody who's going to come in anyways 'cause then basically you just blew a hundred dollars in free chips, right?

BLUMBERG: Right.

GOLDSTEIN: You want to find the guy who is going to come if you send him the enticement and only if you send him the enticement.

BLUMBERG: Right. And so he and his team run these kinds of experiments all the time, trying to figure out who is going to respond to these special offers and who is not going to. But then there's this whole question - what kinds of special offers do you send? And remember, this is Vegas we're talking about, Goldstein.

(LAUGHTER)

BLUMBERG: There's lots and lots of offers you can send. Come, let's take a tour. Are you ready?

GOLDSTEIN: OK. I'm ready. Let's do some shenanigans.

BLUMBERG: Whoosh (ph). We're flying through Vegas. Are you with me? Woosh.

GOLDSTEIN: I...

BLUMBERG: There's lights. There's the desert off in the distance. Oh, look, there's four-star restaurants. There's golf courses. There's the Blue Man Group and, of course, headline music acts like Barry Manilow.

(SOUNDBITE OF SONG, "COPACABANA")

BARRY MANILOW: (Singing) Her name was Lola. She was a show girl with yellow feathers in her hair and a dress cut down to there. She would merengue...

BLUMBERG: You ever heard this song?

GOLDSTEIN: I grew up on that song.

BLUMBERG: (Laughter) Oh, look, and here's Elton John.

(SOUNDBITE OF SONG, "YOUR SONG")

ELTON JOHN: (Singing) If I was a sculptor, but then again, no, or a man who makes potions...

BLUMBERG: And of course, no tour of Vegas nightlife is complete without her majesty, Celine Dion.

(SOUNDBITE OF SONG, "MY HEART WILL GO ON")

CELINE DION: (Singing) I believe that the heart does go on...

GOLDSTEIN: Can I come home, Alex?

(LAUGHTER)

BLUMBERG: Come on back.

GOLDSTEIN: I want to go back to New York.

BLUMBERG: All right. We're back - I'll bring us there - whoosh.

GOLDSTEIN: Thank you. OK. Back to business. Loveman says when he's thinking about what kind of free offers he can give people to get them to come to his casino, he has all these different options at his disposal. And to figure out what to do, of course, he runs experiments.

LOVEMAN: When we're trying to solicit another visit from Goldstein, we're thinking about hotel, food, cash, limousine, entertainment, golf, spa - all these different tools - using a value that he might ascribe to them versus the cost that we have to generate to provide them ourselves.

GOLDSTEIN: So you want the thing where the cost to you is low and the value to me is high obviously. What is that thing? What is a thing where the cost to you is low and the value to me is high?

LOVEMAN: Well, hotel rooms are a pretty good example because the incremental cost of putting you in a room that would not otherwise be used is very low and the value to you might be very high. Privileged access - if I let you cut the line at Pure Nightclub on New Year's Eve, that doesn't cost me much. It's enormously valuable to you. Exclusivity is very highly valued by our guests and is not terribly difficult for us to provide.

GOLDSTEIN: So you put up velvet ropes everywhere and suddenly you have millions of dollars in inducements to give away, and it doesn't cost you anything.

LOVEMAN: Yeah, something like that.

(LAUGHTER)

LOVEMAN: Now, let me give you a counter example. We have Guy Savoy's French restaurant here at Caesars Palace, which is a spectacular culinary experience - three-star Michelin French chef. The meal costs us just about exactly what we charge for it. So if I give you and your wife a Guy Savoy dinner, that's real money. That's a thousand dollars of real money to put you at that table. And you value it at roughly a thousand dollars.

So while it is exclusive, and it's important, and we're happy to do it, there's not nearly as much arbitrage in that as there would be in some of the other examples like the tee time you want on the golf course or exactly the seats you want for Celine or Elton or cutting the line at Pure or having all six women in a party have the same salon appointment or the same massage appointment or things like that. The single most highly valued thing in Las Vegas is exclusivity.

BLUMBERG: But talking to Loveman, it's not just ways to get people into the casino that Loveman tests. It's what to do with them while they're there. All right. So just imagine the gaming floor at Caesars.

(SOUNDBITE OF CASINO AMBIENCE)

BLUMBERG: You got blackjack. You got your different card games going on. You've got slot machines.

(SOUNDBITE OF SLOT MACHINES)

GOLDSTEIN: And in the big picture, what's going on here comes down to simple math that, in the long run, dominates casino games. Every game you play in a casino has certain odds. Those odds are always in favor of the house, of the casino. Even slot machines - the average in Vegas last year for slot machines was that they paid out a little more than 90 cents for every dollar people put in. So on average, you put 10 bucks in the slot machine, you get nine bucks back. You put a...

BLUMBERG: And you lose one.

GOLDSTEIN: And you lose one. You put a hundred bucks in the slot machine, you get a little bit more than 90 bucks back. And you lose, you know, eight bucks or so.

BLUMBERG: But here's the thing. So that's the average. So mathematically, that is a fact, but that doesn't mean that's what happens to each individual player. And Gary Loveman has found that that is a very important distinction.

LOVEMAN: So imagine two Goldstein's playing the same game at the same wager. One Goldstein is behind from the minute he starts playing. And he ends up losing $200 dollars and stops. The second Goldstein starts his visit by winning. And at some point, he's up $300, continues playing and winds up losing $200 and stops. The second Goldstein will always report that visit to have been much better than the first Goldstein because at some point, the second one was playing with the house's money.

GOLDSTEIN: Alex, it was so awesome when I was up 300 bucks.

BLUMBERG: (Laughter).

GOLDSTEIN: I felt like the king.

BLUMBERG: But what about when you were down? It was bad, huh?

GOLDSTEIN: The part where I went in and just lost, that was all bad.

BLUMBERG: (Laughter) Right. The point, obviously, is that the math is the same.

GOLDSTEIN: Didn't feel that way.

BLUMBERG: (Laughter) Right. And the fact that it didn't feel that way to the two of you is a problem for Gary Loveman, right? He wants two players with the same result to feel the same way, like happy, right? He wants you to lose, but he wants you to lose happy.

GOLDSTEIN: Yeah. That's right. He wants to take your money, and he wants you to feel good about it.

BLUMBERG: And so the way he solved this problem was by analyzing the data. And he has lots and lots of data to analyze.

GOLDSTEIN: And really, the key way he gets all this data is through these loyalty cards. You know, you go into the casino, and you get a - it's like a rewards card or whatever. And you use it when you get your chips. And you use it when you're playing the slots. And you get special deals for using it. And it's actually the exact same reason that, like, at the drugstore and the grocery store, they're always asking you, you know, do you have a rewards card? Because, yeah, you know, you can get a little money off, and then the store learns a ton of information about you.

BLUMBERG: Right. And so, like, something like 90 percent of the people who come through his casino sign up for this card. And then that means that they're in his system. They are data now that he can analyze and track and study. And Loveman has looked through the data he gets from these cards, and he has found some really interesting stuff.

LOVEMAN: We have an awful lot of people who visit us one time and never come back for a very long time. And there are lots of reasons for that, but one of them is that on their first visit, it's not a good experience for them. And there's lots of reasons why that might be, but certainly one of the reasons is that the gambling outcome is surprisingly bad for them.

Everybody who gambles knows that the house has an advantage. They're not unhappy that they lose any more than one is unhappy that they paid $40 to walk into the Magic Kingdom at Disney. They recognize there's a fee to provide all this. But they get very unhappy if the loss is surprisingly severe or, as a statistician would put it, if they're in the tail of the distribution...

GOLDSTEIN: (Laughter) Right.

LOVEMAN: ...Rather than the mean of the distribution, right? So we have programs where a customer comes to play, we can observe real time who in the casino is there on their first visit. It's all through that card. So if Jude...

BLUMBERG: So we should jump in here and say, as you've probably noticed - I know, Jacob, you've noticed this - that Loveman likes to illustrate his points by using the people he's talking to as examples. Jude was the producer who was recording him during our interview.

LOVEMAN: So if Jude puts that card in and our system recognizes that that's the first time that we've met her, a flag goes up to the casino management - new customer Jude playing the 25 cent video poker machine number 275 in the front-left corner of the casino. And people on our staff will then begin to monitor all such people. And we focus on those who's gaming results are way out in the negative tail. That is, they're playing a slot machine where they should be getting back 94 out of a hundred dollars, but they're only getting back 50 out of a hundred dollars.

Well, I know that that's a bad experience for Jude, and she's going to feel like this was a very poor first visit. So the question is then, what do you do about it? And you could imagine a couple of answers. One is nothing, which is the normal answer in consumer life. The other is that somebody comes out, introduces themselves to Jude and says hi, Jude. Welcome to - let's say Harrah's St. Louis. Now, the first thing that Jude's going to say is hi, this place sucks. I'm having a lousy day. I can't win anything. And the question's what do you do then? Well, first of all, you apologize. And you say, gee, I'm sorry to hear that. We don't like our customers to have a bad experience. How can I help? And you can help by buying Jude dinner, giving her additional coin to play in the slot machine because at some point, the law of large numbers will bring Jude back to the mean. You could offer her a room in the hotel or a ride home in the limo - any number of different things.

So we do these kinds of interventions. And then we run test and control against it to see whether of all the people having a bad first experience, those who have a visit from one of our staff are more inclined to come back for the second visit. And not surprisingly, they are dramatically more likely to come back.

BLUMBERG: I - that is so fascinating.

LOVEMAN: (Laughter).

BLUMBERG: Because it's, like, sort of the opposite of what I think of as sort of, like, the ethos almost of gambling institution, which is just sort of, like, you coddle the big fish. And the people who're going to lose and then go home, they're just sort of like ah, screw them. They're never going to come back.

LOVEMAN: Yeah. I mean, that's a very widely held but - if I may say so - completely wrong interpretation of what we want to do. For example, if I'm offering blackjack - and blackjack has an advantage to the house of a few percentage points for those who play it reasonably well - I would rather have a very tight distribution around that result than a very wide distribution where I have a lot of people that win enormously than a lot of people that lose enormously and generate the same outcome - because the ones who lose are never coming back.

Do you come to my facility - and my service is good and my food is good and my beverages are good and you lose at about the rate of the average of the games' mathematics, we're all going to do fine. You're going to have a great time. Your friends are going to have fun. And you'll be a customer that comes back to see us. So if you give people a chance to feel better about a visit that isn't going well, makes a big difference. Now, when I was an academic, I did this with airline data.

So imagine through frequent flyer data that we observed that Jude had a visit on an airline. The flight was delayed, and her bag was lost. Is it any mystery that she hates the airline? No, she hates the airline. You know that. So if you want her to visit the airline again the next time, how would you treat her? You'd want to acknowledge that the last trip was a bad one, and you're going to try to do something to make it up. It's exactly the same idea, but the airlines never do that.

(LAUGHTER)

LOVEMAN: Even though they know the same thing I know, they don't do anything to address it.

BLUMBERG: All right. It's hard to talk to a CEO of a gambling company - even somebody who is math-driven and sort of entertaining to talk to as Gary Loveman - and not have this thought occur to you - what about the people whose lives are ruined by gambling? You know, we've all heard these stories. There's people who lose their houses, their jobs, families break apart because they have this compulsion, this addiction to gambling. And Loveman says they think about this a lot but in their usual math-driven way.

LOVEMAN: The evidence from places like the Harvard Medical School school of addictions indicate that about 2 percent of active gamblers are addicted at any point in time. So our objective is to try to identify addicted gamblers as best we can and encourage them to seek treatment and help and, to the degree they're willing to identify themselves as addicted or troubled gamblers, not serve them in any fashion - not market to them, not lend them money, and, where the law allows, not permit them in the casino.

And that's what our staff are trained to do, and that's what our systems support us doing. But unfortunately, many addicted gamblers, much like people with other addictions, will go rather considerably out of their way to make themselves anonymous. So they're part of the group that won't use a total rewards card and won't make themselves available for certain benefits and therefore are - will play at all the casinos rather than putting all of their business at one, so that it becomes a more difficult problem to address.

BLUMBERG: Does that hurt your bottom line at all though? I mean...

LOVEMAN: No.

BLUMBERG: ...I would have to imagine that - a gambling addict is probably good business, although is that true?

LOVEMAN: No, no, it's - we do not believe they're a big part of our business. And we don't want to serve people with addicted gambling problems. I have 75,000 people that work with me who go home to their families and kids like I do. None of them want to go home thinking that they just helped an addicted gambler do further harm to themselves or their families. So we do not wish to be in the business of serving addicted gamblers. And we do not believe it - whether or not it has anything to do with our income statement, we don't want to do it. But I don't think it has much to do with our income statement.

(SOUNDBITE OF SONG, "DANCE FLOOR")

THE APPLES IN STEREO: (Singing) I walk into the night, aim for the city lights, but my mind is still running. I can see your face again. I can see my...

GOLDSTEIN: If you know any other nerdy econ CEOs out there in the world doing weird experiments and trying to figure things out, please let us know. We'd like to talk to them too. You can email us at planetmoney@npr.org.

BLUMBERG: You can also find us on Facebook, Spotify or Twitter. I'm Alex Blumberg.

GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.

(SOUNDBITE OF SONG, "DANCE FLOOR")

THE APPLES IN STEREO: (Singing) But my body's still moving. Tell me, do you know where are we to go when our worlds are so confusing? Ooh, I wanna go there. Sensations fill the air in my sweet...

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