Posted by Cameron @ 5:37 am on July 18th 2009

The logic of a casino’s $5 ATM fee

The Economist’s Free Exchange blog led me to this fascinating take on ATM fees in casinos. This was the quoted original post from Marginal Revolution:

Should the service fee by high or low? It could cut either way. A low service fee encourages withdrawals and thus gambling, which is profitable for the casino. A high service fee takes in money from the desperate and those with high time preference. It was $4.99. On the other hand, they let you take out up to $1000, well above the average.

The option between high and low seems straightforward enough until you factor in the public’s hankering for a deal. As Julian Sanchez notes:

Obviously, nearly $5 is an unusually high service fee, and I think it makes perfect sense, because there’s an important missing angle here: The effect of the fee on the size of withdrawals. I don’t know about you, but when I’m out in a place where the only convenient cash machine has a high fee, I tend to take out significantly more cash—usually more than I think I’ll need—because the last thing I want is to get shaken down twice.

So by raising the fee to acquire cash you induce the public into withdrawing more they normally would right before they walk into an environment where cash in the pocket evaporates easily. How clever is that? Especially with that max rate of $1000 it’s easy to turn an original plan to withdraw $100 and incur a 5% fee into a withdrawal of $500 and only incur a 1% fee. Of course, the casino will probably walk away with a good portion of those extra four hundred dollars. It’s a fantastic implementation of human nature against reasoned better judgment.

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