How 3 Gamblers Stole Millions From Casinos - Kit Chellel

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1:15Imagine you're a smart guy. You've got a college education. You could do anything you want with your life. Imagine leaving a normal life behind, moving to Vegas, moving into a small apartment with six other dudes and spending all day counting cards in the casino. It's a weird career choice. So something is making them do this and something is keeping them in the game for decades at a time. And they describe not the addiction of winning because they're not addicted to the feeling of making money from a bet. In fact, they switch that part of their brain off. When they win a bet, they feel nothing.

1:41That's the whole point. They turn that side of their brain off. What they get a positive feeling from is coming up with a new idea, testing it, quantifying it, taking it into the casino, and then seeing their idea borne out in reality. That's an incredibly satisfying feeling, especially when you know you're the only one doing it. And then when you walk home at the end of that period, which might take a year, two years, and you've got a million dollars in your pocket, you feel like a superstar. Welcome to Open Book. I am your host, Anthony Scaramucci. Joining us now is Kit Shalel. Hopefully I pronounced it right, Kit.

2:09Don't be mad at me. author and reporter at Bloomberg but this book is incredible the title of the book is Lucky Devils the true story of three rebel gamblers who beat the odds and changed the game and I gamble constantly you know I'm I just don't gamble in a casino right I'm long bitcoin I'm buying this thing buying that thing I'm putting money in venture but this is a different form of gambling that i'm used to and this is a amazing story about a lot of different intersections to things crime power chance investing everything is in here um what drew you to these three gamblers in their world uh i think i was fascinated to discover there are there are there are gamblers who apply a sort of scientific data-driven uh statistical mindset to the act of betting on blackjack or roulette wheel or horse racing those things always seemed inherently random to me and i had no idea there was this secret community of people doing genuinely world-class science and you know pioneering technology for the purposes of making a bet now i don't gamble myself like you i don't really go in casinos but i kind of love the idea of people using technology to get edge so kit who who are these guys what made them believe they could beat a system that frankly nobody beats okay everyone loses to this system these guys say no not us tell me why yeah a couple of things uh fundamentally they are uh devoted to science science is their religion okay so um if if the site if the data is is bearing out their belief system they you know they will they will believe they can do things that are said to be impossible and the second thing is this kind of this amazing confidence to go to las vegas and go i'm i'm going to be the one that beats the house maybe a little bit of arrogance but certainly like rock solid self-belief i think i think the thing that uh i always tell people is you don't lose money in a casino if you don't gamble and nobody makes money in a casino but these guys do right so so it's not and it's a combination of things right it's card counting early computers predictive models uh you know take us through some of the methodology how does uh you know i mean i mean i think the roulette those 31 to 35 to 1 odds against you at the roulette wheel right yeah but if you do what i do my only casino bet whenever i go to a casino is i bet on black at the roulette table so my chances of winning basically a coin toss a little less than 50 sounds stupid actually it's not a bad casino bet but the odds and casinos are designed to be only slightly in the house's favor the game can't be so unfair that you've got no chance of winning so they have to balance it quite carefully they want to win mostly but they also want to give you hope and that's kind of the secret for advantage plays because the house edge is small you only need to be a little bit smarter than average to turn a profit you only need to be 10 better than dumb luck to overcome the house edge and then once you've got your advantage you just play over and over again thousands of times until your profit comes when i look at this story and the reason why i think the story is so intriguing i actually think this is like a hulu or a netflix or an hbo story because these guys all describe their backgrounds and describe the decision making that made them decide to go in this direction yeah the whole the whole scene of advantage gambling these professionals they come from a sort of singular moment in time and a singular place in time which is las vegas in the late 70s and early 80s and this was sort of the heyday of card counting this is when thousands of young mostly men from all over america who were good at maths and had read a book called beat the dealer they all descended on las vegas to try and make it big as as gamblers so while this sort of intellectual firepower comes to the city of sin at the same time you've got the personal computer at the dawn of the personal computer era.

6:35The Apple II goes on sale in 1982, I think it was. And so for the first time, you've got mathematically minded people who have access to this technology that when it comes to games of chance is incredibly powerful. You know, being able to have access to an odds processing device in your pockets gives you significant advantages that no one had had before. So all these guys were developing wearable computers and writing their own software. And they were doing it at a time where you could make real money in Vegas doing it. And the whole scene we have today, what we call sharps, professional gamblers, the people who do it right, you can trace most of them a lineage directly back to the early 1980s in Vegas.

7:17You know, the moment that blackjack becomes too easy to them, which is actually a crazy sentence in itself because I am a pretty decent numbers guy and I know how difficult it is, okay? And they're almost like, to me, they're almost like proto-quant traders. You know what I mean? Like they've got everything going on. What does it say about the mindset of somebody who goes in there and is just trying to outsmart the system? And what does it say about the casinos who are actually not up to, I mean, they eventually get up to speed. You write about this because of these guys. But I want you to describe that cross-current.

8:00They're coming in as proto-quant traders. Casinos, they've got the eyes, but it turns out they're off. And how long does it take them to figure it out and so forth? Yeah, you could draw intersecting lines on a chart about the prominence of advantage play and casinos' tolerance of them. These guys, they're fundamentally motivated by winning. It's not so much money, and I guess you get this in the financial markets too. it's being the best they want to be the smartest guy in the room they want to be the first one to beat roulette to have a sustainable model for beating roulette so there they see themselves as pioneers and the and the casino for them is the enemy now casinos have said for a long time the best thing that ever happened to the casino industry in the united states was card counting because for every one one card counter that can actually you know keep a running count in their head and execute and manage their bankroll there are roughly 999 others who think they can do it but they can't so all these people come through the door and spend their money thinking they can beat the game only a handful can and for a long time casinos tolerated that as a cost of doing business and they didn't seem to care that much i mean they made half-hearted attempts to throw out advantage gamblers the security was a bit lax though um but then the scene got too big at one point there were like five six hundred card counters making a living in vegas you know and they were making really good money and when when it started hurting the bottom line the casinos cracked down on it um well i mean you you say there's hundreds of millions of dollars were made over a 30-year period of time right so so you know but also tell me the psychological impact of the winning yeah you talk i often talk to these guys because they have such a weird job i mean imagine you're a smart guy you've got a college education you could do anything you want with your life imagine leaving a normal life behind moving to vegas moving into a small apartment with six other dudes and spending all day counting cards in the casino it's a weird career choice right um so something is making them do this and something is something is keeping them in the game for decades at a time and they describe the sort of not the addiction of winning because it's not, they're not addicted to the feeling of making money from a bet.

10:18In fact, they switch that part of their brain off. When they win a bet, they feel nothing. That's the whole point. They turn that side of their brain off. But what they get a positive feeling from is coming up with a new idea, testing it, quantifying it, taking it into the casino, and then seeing their idea borne out in reality. That's an incredibly satisfying feeling, especially when you know you're the only one doing it. And then when you walk home at the end of that period, which might take a year, two years, and you've got a million dollars in your pocket, you feel like a superstar. All right.

10:48So you follow finance as well and you know I'm a fund manager. What could fund managers learn from these guys? I mean, a lot. I think there's a symbiotic relationship between advantage gambling and financial markets. It always has been. The inventor of card counting, Ed Thorpe, as you may or may not know, went on to start an options trading hedge fund at Los Angeles. Didn't he blurb the back of your book? I think he did, right? Or no? he did yeah he did but he he spent most of his career as an options trader yeah um the mindset of the advantage gambler which is to find a small edge exploit it as much as possible before it goes away you know these big data driven decision making processes tolerance of risk it's the same thing you find in successful markets people so yeah go around the biggest hedge fund hedge funds on wall street how many of the founders played poker in college to a high level you know how many of those guys are interested in in sort of data driven sports betting or betting on horses you know there's there's there's a lot of crossover there thank you for tuning in to open book and if you haven't already please hit the subscribe button below so that you're the first to know when our new episodes drop each week we've got a lot more coming and now back to the show you know There's a section in the book where you're writing about the Hong Kong racetracks.

12:09These are incredible places. I lived in Hong Kong in 1998 right after the turnover. Just to set the scene for people, these are 85 ,000 seat stadiums. It's a totally different universe than Vegas. How did the gambling landscape shape what was possible for these guys in the different genres? I mean, horse racing in Hong Kong is so big. I mean, the thing that blows my mind was the idea that the jockeys, a little jockey, a little five-foot guy, they're rock stars. They can't walk around the city without being mobbed. They're on billboards. You know, they have a level of stardom that, you know, horse racing doesn't get anywhere else in the world.

12:53Because the sport is so big, the pools of money that are better are enormous. You know, I think at one point, people in Hong Kong had 7 million population. they were betting more than the entire population of the united states just on horses so they're you know it's a bet mad country uh but the the sums of money being bet makes a really good place if you want to be an advantage gambler because the betting pools are so large you can operate mostly unnoticed for a long time now if you go to a little u.s racetrack and you're dropping three million dollars on six races you know you've not only very quickly going to change the entire market odds for everyone um you'll be noticed and you know you you blow your cover in hong kong bill bento you know one of the main characters in the book he was there on and off 30 years and at no point did the general public cotton on to the fact that the biggest player in their market was a foreigner with a computer in a high rise near the happy valley he just kept it he kept amazingly he kept it hidden he wouldn't have been able to do that in a smaller market so So I haven't read this book and I have to confess that I haven't read it, but you wrote a book called Dead in the Water, which, you know, you're a little bit of a nut, okay?

14:09Because you're writing about murder, hijacking, maritime fraud. It gets shortlisted for the FT Business Book of the Year. So what draws you as a personality to these hidden worlds where enormous money is changing hands in the shadows? I mean, personally, I love the idea that there's a world that's public that's on display. mostly that's the world of advertising of propaganda of politics it's the world that's sort of spoon fed to us and i love the idea that there's another world beneath that which is how things really work and if you do my job i'm sure in your job too anthony when you see the nuts and bolts when you see how decisions are really made it's often incredibly different to the way you imagined it um so shipping was a good example of the thing that we see when we go out in the ocean no i was just going to say you know that's totally true in the world of politics but please go into shipping thing in the ocean although i was i was just going to say what we know about shipping is not how shipping really is you know shipping is dangerous and corrupt we're seeing this now in the strait of homos but but you know for many years it's just not something that the general public was aware of um the same is true in gambling i mean i have relatives who who bet on the horses all the time they had no idea that there existed such a thing as a betting syndicate they just didn't know it was out there now these betting syndicates are moving the odds for the whole world and the fact that the general betting public has no idea they exist or how they make their money blows my mind you know i'm sure it's the same with you when you see politics up close the contrast how it's portrayed in the media i'm with you kid i had the rudest awakening of my life i happen to think of myself wrongly i thought i was like a street smart kid from long island and I was getting my eyeball stabbed out by like assistants in Washington.

15:53You know what I mean? They were like more aggressive and more vicious and more ruthless than I could ever possibly be. I mean, they take your eyeball out and put it in a martini glass. You're bleeding at the table. They're talking to you like nothing happened. You know, I mean, it's brutal. But I find the fact that you got all three of these guys to talk to you on the record was fascinating. So like question number one, how hard was that to get done? And then question number two, which sort of the real curiosity question for me is why, what did they want people to understand about what they had done?

16:31How'd you get them to talk? And then what was their messaging? What were they trying to convey? The first part of that is it was really difficult. I mean, like I do investigative journalism. I often write about organized criminals or, you know, sort of grand scale frauds. it was harder to get people who bet for a living to talk to me than you know people who break the law for a living they just incredibly secretive and paranoid about public exposure for good reason just not good for them um the way i did it was uh uh lots of annoying polite persistence i just didn't go away you know i just i was gonna write about it anyway honestly like the story of a billion dollar horse racing hedge fund it was too good I had you know I had to write it um it took nine months of asking and the thing that eventually got Bill Benter to open up was when I took a transatlantic flight and showed up at his door in Pittsburgh um I think that showed him that I wasn't going anywhere that I was serious but also you know meeting me face to face I wasn't trying to hurt him and I wasn't trying to steal his secret recipes for success you know I think it's pretty clear i'm not i'm not a mathematician i'm not a gambler i'm not going to set up a ride look you're a storyteller you're and you're a phenomenal storyteller so i get that and i'm going to go back and read your other book by the way um james mcmanus also blurbed your book and he said something about ai powered algorithms making human betting decisions obsolete are we are we heading in that direction um do you think that uh this will further complicate casinos etc i think we're already there quite honestly i think um there's lots of areas of life where ai is uh kind of a blunt tool it's bad a lot of things but it is uniquely good at processing large data sets and spotting patterns and trends and causalities that are incredibly different difficult for you know the human cognitive process to recognize bill bentor uh the most successful horse racing gambler in history he built his algorithm piece by piece by trial and error he guessed that the weather might be a factor so he quantified it he guessed that the horse's most recent run of results was a factor he did it by trial and error over two decades when i last saw him in pittsburgh he told me he now uses an ai model and he can achieve better results just by he has an enormous data set, to be fair.

19:04He has 30 years of horse racing data and he knows how to use it. He now just puts it into the AI model and it finds things that he's never seen before in 30 years. If he is doing that, and he's one of the biggest moves in horse racing markets, the other syndicates are doing it too. So it's already there in horse racing. If it's already happening in horse racing, it's already happening in sports betting. So if you are betting on either one of those things, you are probably competing against someone who's using AI to inform their decision making that's already happening and so then it starts this new arms race the way it's always been with tech gambling it's always the gamblers that come up with the innovation and the advantage and then it's the house the casino the bookmaker the online platform now that has to find a solution to stop themselves losing money so now you have ai gamblers you're going to have on the prediction markets and on the big sports betting apps tools to limit the success of that method but i think right now it's a good time to have that because it's so early first mover advantage i mean let's just say it's a it's a it's a phenomenal observation and the insights on the book are amazing you you end the book by what we're turning gambling's oldest rule okay the house doesn't always win basically i mean right because i mean i learned as a kid the house always wins but you're telling us that it doesn't but the question i have is did these three guys beat the house or did the house eventually claw back on these guys and if they did how how did they claw back on it's a good question i mean success is relative in any in any craft right uh i think one of my characters did did by any measure extremely well you know he made hundreds of millions of dollars he is an extremely wealthy man he's dedicates his life to philanthropy that's bill bent of the horse racing guy the other two you know still that the cyclical boom bust nature of gambling still exists for them even even using their method so yeah i mean i would say all three of my guys are up over a career but the house has one big advantage they get to decide who plays and so you can have the best model in the world you can have the most advanced algorithm in the world you can have an ai system that is better than anything else in existence and the platform can come and just shut you down, take your money.

21:23And there's almost nothing you can do about it. You know, it's a fascinating observation because a lunch counter, everybody's got to get served. There can't be any discrimination. But in that casino, they can pick and choose who they want to sit and have placed bets. You know, so it's interesting. Okay, so we're at the point of the podcast where we came up with five words from your book. I'm going to read the word and then I want you to react to the word and give me a sentence or two. Okay, you ready? I'm ready, shoot. okay gambling uh exciting i think you know there's a reason that people do this i mean it's not too often it's viewed in popular culture as a vice or a disease or something awful but we've been gambling since we crawled out of caves it's just it's part of human nature and there's a reason you are so right kid and i've told my sons a guy gets brought down by gambling booze and alcohol and women okay and i'm not trying to say that to objectify women because you know i'm talking about the sex addiction part of it right so that's what feeds the brain and the adrenaline is there okay i say the word markets markets uh complexity you know gambling markets are simple compared to the markets you work in um there are fewer participants there's low liquidity the decisions you're making are in some way simpler but even at the scale of betting on the horse race in Hong Kong there is a level of complexity behind the scenes of sophistication that you just can't see as a consumer but it is there and it's moving markets and you may well not understand it okay very well said okay I say the word risk risk I mean I instantly think reward you would you were talking about um you know the negative impact of gambling but without wanting to sort of proselytize for the industry I think there's such a thing as a good bet, you know, it exists in finance, it exists in a very rare form in casinos in the form of advantage gamblers.

23:20But, you know, anytime that you apply resource to something for an uncertain outcome with one good outcome and one bad outcome, that's a gamble. Okay. And throughout human history, what sort of sets us apart as a species is we've made some really good ones. You know, we've gambled on technology, we've gambled on crossing oceans, we've gambled on going to space, all these things were risky uncertain decisions one of the reasons that we've advanced so far is our ability to imagine and quantify complex risks so it's not all bad you know this mindset actually can be useful for us okay winning winning uh okay that's a good one winning undefinable i mean one of the reasons i wrote this book was to learn what it takes to to be a winner right in this in this narrow setting betting on a on a sport or a casino game what does it take to be a winner um and i'm not sure i know the answer still and i'm not sure what winning really looks like in this setting um they dedicated their lives to a craft uh they won money they lost money they had amazing experiences but did they win like could they have spent their their effort better elsewhere maybe so it's so funny in the context of this book when i hear the word winning i think never enough it just doesn't feel so satisfying kit does it i think you get numb um well especially especially if you're numb right but if you're gambling if you're gambling it's very easy just to see your gambler's numbers.

25:02I've talked to professional gamblers about this phenomenon. I'm sure it happens in financial markets too. You know, they're looking at numbers on a screen and the numbers for them are essentially meaningless. They're not interested in the identity of the horse or the jockey or the team even often. They're just processing data. And so the numbers at some point get so big, they get very detached from reality. At one point in my book, Bill Benter wins$16 million, dollars one of the largest horse racing jackpots in the history of the sport and he gave it up he left the ticket unclaimed and let it go to charity you know but at that point he was many he was winning hundreds of millions of dollars a season the numbers sort of lost meaning for him um yeah the money quite quickly it becomes imaginary money it becomes you know digits on a screen or chips in your hand it doesn't seem real not this is something i've ever experienced myself but i hear that's what people feel i don't know it feels like it once you get started on the path the path i think doesn't go exactly the way you would like it to let's put it that way all right this is the last word i'm going to give you the last word i say the word luck i don't i don't think luck exists i think luck is a is a semantic device that we use to explain things that we don't understand um there's no such thing as luck um you know uh successful gamblers don't rely on it or use it or or it doesn't factor into their thinking.

26:26There are large numbers, okay? That's what they care about. Anyone can be lucky. I could walk into a casino and do my$100 bet on black, which I always do. And I could walk out with double my money. But I couldn't claim to be a success or an ingenious gambler or be a fool if I did. But to do that a thousand times and still be up, that's the thing. you know that's what separates the these guys the the lucky devils from the mere mortals it's doing it over and over and over again and when you're thinking about large numbers luck stops being a factor same in financial markets you're a hedge fund you have one great year you're up 40 percent everyone declares you to be the world's greatest genius you know as often as not you just got lucky with your choices how but how have you done over 10 years how about over 20 you know that's that's the difference that's what's that's what separates the elite from everyone else yeah well we we agree and i think i think i always tell people you have to stay in the game because you know you know i agree with you on the word luck but i'm going to use it in this context you only have to be lucky once if you get if you get my industry right you know as an example you can buy anthropic and five years ago it's up 140 times now i may have had to buy 10 different things and i I got zeroed on nine of them, but the one anthropic has made me the money.

27:55You see what I mean? So you can call that luck. You can call that statistical betting. But I call it staying in the game, you know, and being prepared for every at that that comes up in the game, you know? Yeah, it's about making lots of good bets and allowing yourself to be lucky, to use that word. You have to allow yourself to give yourself opportunities to benefit from your decisions. And that means not pitching everything on one stupid bet, which I do when I go to the casino. That's making a couple of hundred really good ones and making sure you exploit the ones that come off. Well, this has been a fascinating conversation for me.

28:33The title of the book is Lucky Devils, the true story of three gamblers who beat the odds and change the game. Just a fascinating read. You're a great storyteller and a great writer. Kit Shalel, ladies and gentlemen, thank you so much for joining us on Open Book. Thanks, all the best.