Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iima.ac.in

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Wed, 08 Feb 2017

Predicting human behaviour is legal, predicting machines is not?

I read this Wired story about some hackers being sent to jail for “hacking” slot machines in US casinos. “Hacking” is probably the wrong word to use for this: they made money by predicting what the slot machine would do by observing it carefully, and using their knowledge of the insecure random number generator used in the software of the slot machines. It appears therefore that it is illegal to predict what a machine would do by figuring out its vulnerabilities and observing its behaviour.

The irony of the matter is that the entire business model of the casinos is built on figuring out the vulnerabilities of the human customers, predicting how they would bet under different situations and designing every minute detail of the casino to exploit these vulnerabilities. The New Yorker had a story five years ago about how a casino was redesigned completely when the customer profile changed from predominantly older male customers to more women:

So Thomas redesigned the room. He created a wall of windows to flood the slot machines with natural light. He threw out the old furniture, replacing it with a palette that he called “garden conservatory” ... There are Italian marbles ... Bowls of floating orchids are set on tables; stone mosaics frame the walkway; the ceiling is a quilt of gold mirrors. Thomas even bought a collection of antique lotus-flower sculptures

Casinos “monitor the earnings of the gaming machines and tables. If a space isn’t bringing in the expected revenue, then Thomas is often put to work.” The design is optimized using a massive amount of research which can justifiably be called “hacking” the human brain. If you look at the Google Scholar search results for the papers of just one top academic (Karen Finlay) in the field of casino design, you will see that she has studied every conceivable design element to determine what can cause people to bet more:

The more recent studies on human behaviour are done using a panoscope which:

features networked immersive displays where individuals are absorbed in an environment (12 feet in diameter) that surrounds them on a 360-degree basis. ... Use of these panels creates a totally immersive life-like experience and facilitates the delivery of these manipulations. (Finlay-Gough, Karen, et al. “The Influence of Casino Architecture and Structure on Problem Gambling Behaviour: An Examination Using Virtual Reality Technology.” ECRM2015-Proceedings of the 14th European Conference on Research Methods 2015: ECRM 2015. Academic Conferences Limited, 2015.)

I do not see how this kind of attempt to fathom the workings of the human mind is much different from the hackers buying scrapped slot machines and figuring out how they work.

The better way to think about what is going on is to view it as a bad case of regulatory capture. The Wired story says that “Government regulators, such as the Missouri Gaming Commission, vet the integrity of each algorithm before casinos can deploy it.” The sensible thing to do is for the regulators to decertify these algorithms because the random number generators are not secure and force the casinos to use cryptographically secure random number generators. The casinos do not want to spend the money to change these slot machines and the captured regulators let them run these machines, while taxpayer money is expended chasing the hackers.

Perhaps, we should be less worried about what the hackers have done than about what the casinos are doing. Unlike the vulnerabilities in the slot machines, the vulnerabilities in the human brain cannot be fixed by a software update. Yet hacking the human brain is apparently completely legal, and it is not only the casinos which are doing this. Probably half of the finance industry is based on the same principles.

Posted at 17:42 on Wed, 08 Feb 2017     View/Post Comments (0)     permanent link