The Calculus of Re-Opening

Everything is a calculation in business, but reopening after the Covid-19 shutdowns has a risk assessment that includes deaths and infections. How much is too much? Gaming expert Richard Schuetz (l.) really hopes the rewards are greater than the risks.

The Calculus of Re-Opening

Things always become obvious after the fact.—Nassim Nicholas Taleb

The casinos are open and this fact will most certainly cause people to die through the transmission of Coronavirus. That is the reality. The only real question becomes how many? The implicit math behind the decision to open is that the loss of lives is a cost that needs to be borne in an effort to help the economy recover from the damage of closing.

People dying is a sad and terrible thing, but so too there are costs in both financial and human terms associated with high rates of unemployment. It seems the powers-that-be have now determined they have insight into the number of infections and deaths that will occur and this understanding presents an acceptable risk profile. To be blunt, it appears the body count will be acceptable. It is my belief, however, that this assessment is based on a best guess for none of us yet understand the underlying equations and the ability to mitigate risk along those equations.

Governments make body count decisions all of the time. The massive death toll associated with the Vietnam War (called the American War in Vietnam) was a body count decision where our government concluded all of that death was justified in order to stop the spread of communism in Asia. The only thing that wrecked this for the government was a free press that ensured our wars could be broadcast on the six-o’clock news, and Americans (and Walter Cronkite) got a bit uneasy having to look at those dead bodies every night during the dinner hour. Fighting to stand up for God, democracy and capitalism was a wonderful thing, but not when the reality of the human costs of war was brought into the home each evening over supper. It was the costs reflected in those visual images that helped stop that war, allowing the US to declare victory and leave that country in a hurry.

In 1991, we started getting back into the war business and the US enacted a law that all military caskets had to arrive back in the US at Dover AFB and they could not be photographed. The motivation for this decision, we were told, was to protect the privacy and dignity of the families, and that does make sense. Some families, veteran groups, and anti-war groups disagreed with this opinion, however, and argued the decision was made to hide the huge human costs of wars, thus making it easier for the government to engage in such activities. In 2009, this law was changed to allow the families to decide if the caskets could be photographed, rather than allowing the government to make the decision.

Even a decision on the speed limit for a highway carries with it a cost in human lives, with higher speed limits translating into greater fatalities. The point is, the public policy of a government is often a body count issue, although the government often works to disguise that reality.

The decision to close casinos was a decision made under conditions of both risk and uncertainty, and I am using those terms as an economist would. In the field of economics, the early discussion of risk and uncertainty came from an economist by the name of Frank Knight. Dr. Knight was a most brilliant gentleman who taught at the University of Chicago and was basically a large part of the intellectual inspiration for what is known as the Chicago School of Economics. Students of Dr. Knight were such people as Milton Friedman and George Stigler, and he has inspired, in one way or another, a great many economists for the last century.

In his book Risk, Uncertainty, and Profits, published in 1921, Dr. Knight argued that risk was a situation in which the outcome was unknown, but a probability distribution could be established for differing outcomes. To put this into casino-speak, with risk we can attach odds to outcomes. Uncertainty, in Dr. Knight’s view, was defined as having insufficient information to construct a probability distribution, that is, there are too many unknowns to develop odds. Using automobile deaths as an example, we can make some pretty good odds for the number of traffic deaths if we are looking ahead for a few years, but we have no earthly idea how many people will die in auto accidents in 50 years for there are too many unknowns, including such things as will there be automobiles?

People can be very bad at assessing risk, and this is captured in the notion of risk telescoping. The point of this term is that people often perceive the risk of something and that perception has nothing to do with the reality of the risk. After the movie “Jaws,” people would drive to the beach, but were afraid to get in the water whereas the risk of bad things happening on the drive to the beach greatly outweighed a reasonable expectation of the damage that may come from a shark. The same fears surround many people who get to the airport by car. The car part is the risky part of the trip, and people should focus their anxieties on this, and not on the airplane part of the trip.

Following the two world wars our planet experienced in the last century, it became a concern that our military leaders were potentially managing risk badly as demonstrated by the large numbers of people who were being killed. There was a strong impetus to add an appreciably scientific element to the decision processes as a means of better managing risk and therefore potentially slowing some of the human carnage. This has led to much greater energies being directed at decision theory and risk management, with a strong reliance on math, statistics, and probability. In other words, there was a strong effort to turn the approach towards risk into a science.

When the casinos were closed, there were elements of both uncertainty and risk that made the closing decision reasonable. With the passage of time and the acquisition of data, it appears we better understand we are in a situation that is more defined by risk than uncertainty. We now believe we better understand the risk. We also seem to believe we can manage aspects of that risk. This allows the powers-that-be the opportunity to utilize a calculus to assess the opening decision. So here we are.

This does not mean the reopening decision is being addressed by way of a scientific analysis of risk nor does it mean it is an easy decision to make. I started formally learning about risk in 1969 from Dr. Bill Eadington’s probability and statistics class at the University of Nevada, Reno, and one of his first examples had to do with parachute cords. His point was there were two types of mistakes that could be made with parachute cords, and these were making the cords too strong or making the cords too weak. If they are too strong, material is wasted in the production process, whereas if they are too weak, well…. splat. For this reason he argued that one better understand the character of the underlying risk distribution regarding parachute cord strength, and the real importance of variance in this case, before getting involved in approving parachutes. I would add this is especially important if people have skin in the game, that is, they are the wearer of the parachute.

Anyone who suggests there will not be any deaths associated with coronavirus as a result of the reopening of the casinos simply does not get it. There will be infections and deaths. But the folks making these decisions appear to believe they do understand the character of the underlying risk distribution and/or they can reshape and/or manage this distribution by developing sound re-opening strategies so the risks can be mitigated to an acceptable level. Not to rain on anyone’s parade, but I will remind readers about the last great disaster in the casino industry and the larger economy in general, known now as the Great Recession. It was brought on by a complete failure of what were known of as value at risk models. Today, it is unclear to me exactly what model we are using in the opening decision, although given the terrible condition of the data, it probably does not matter.

I remember back in the good-old-days, maybe six or seven weeks ago, when the model was to look for a defined decline in infections for a period of time, have an ability to test large masses of the population, and to be able to contact trace. These conditions, combined with sound mitigation plans, would lead us to the Promised Land. Yes, those were the good old days, and I’m sure a few of you are old enough to remember these times. Apparently, now those concepts are very old fashioned.

Aside from all of that, I do have other problems and that brings me back to the nagging question of body counts for no one has defined the meaning of an acceptable level of deaths. That is, what is the reopening goal statement in terms of deaths? Have minimax criteria been established? We need this to understand how to evaluate whether the reopening was appropriate, or a huge failure, and what are the criteria to abort, if any, of the reopening plan? All parties seem very good at saying that transparency is important, so it seems we should know the answers to all of these questions. My sense is there will be no announced criteria as to what constitutes a failure and it will be simply to keep-on keeping-on and let God sort it out. It is important to understand there will not be a robust solution to this all, in a systems sense, until there is a vaccine, a miracle, or the herd becomes immune.

The risk towards the casino herd is also interesting to contemplate. In a market like the Las Vegas Strip, customers who may become infected will probably get on a plane to someplace outside of Nevada before the reality of their infection is known. This is a different situation than what Pennsylvania will experience in that the majority of casino guests are from within that state. This could play into the fact that Pennsylvania is requiring all guests to wear masks, whereas Nevada is just recommending them, and from early observations, not many people care about that recommendation. This seems to be somewhat important because the more recent “new understanding” about coronavirus is it very possibly may be most effectively transmitted in aerosol form and masks are a critical element in a mitigation program if this is the case.

Aside for the curiosity of some jurisdictions just recommending masks, there is this fascinating distinction that seems to be creeping into casino opening language about proper social distancing and appropriate social distancing. Best as I can figure is the “proper” denotes a distance of six feet, whereas “appropriate” means whatever the operator wants it to be, subject to the approval of the regulator. One can possibly see Dr. Fauci wincing in their mind’s eye at how appropriate “appropriate” is.

I am also troubled by my personal belief that the infection rate of casino employees resulting from reopening will be inversely related with their income levels in the casino eco-system. I also believe these infections will be inversely related with their whiteness. In other words, the people being subjected to the highest degree of risk will be people who are on the lower level of the casino income scale and also from those job categories that have higher levels of people of color. I believe that if this virus were tricky enough to single out casino executives, hedge fund managers, the private equity folks, or political donors, the casinos would be very slow to reopen. I also am a strong believer that decisions are best made by people with skin in the game, and I believe the people who have the most skin in this game, that is, the lower-income workers and people of color, do not have much say in the opening decision, other than deciding to give up their jobs.

Nassim Nicholas Taleb argues: “Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions,” and I agree. The people who will be making this decision, namely the politicians and regulators, will not be the ones who will be dying from this decision, and if these folks have made mistakes in understanding the underlying risk distribution, or the effectiveness of the mitigation measures, a lot of people could be dying.

I believe the politicians and the regulators do understand enough about the risk that they will not be spending any appreciable amount time hanging out in the areas of casinos that are frequented by the public. Maybe a walk through for some public relations shots every now and then, but they will not be hanging out. The regulators and politicians do not want their skin in this game.

I hope the politicians and the regulators understand they are potentially sentencing some people to death if their model is wrong, or they miscalculate the power of the mitigation plans. Given the absence of anything I can see that even remotely resembles a model, and a mass of data that is a disaster, there is a fairly large risk factor that this could be the case. I believe that what the politicians and regulators are doing is not so much science, but a combination of heuristics and prayer. They are now throwing a whole bunch of people out of an airplane attired with parachutes. Let’s hope those cords are strong enough.

Articles by Author: Richard Schuetz

Richard Schuetz started dealing blackjack for Bill Harrah 47 years ago, and has traveled the world as a casino executive, educator and regulator. He is sincerely appreciative of the help he received from his friends and colleagues throughout the gaming world in developing this article, understanding that any and all errors are his own.