The Three Core Elements That Make Up Gambling

Generally, whether an activity constitutes gambling hinges on three core elements: (1) chance, (2) consideration, and (3) prize, each with its own definition. But all three elements have to be present—take one away, and it’s not gambling.

What qualifies as chance, consideration, and prize is not straightforward and, in fact, the interpretation of these elements differs dramatically among the states. What of the many forms of gambling are permissible in one state may not be permissible in another. Given this inconsistent patchwork of laws and treatment, if you’re planning or proposing to operate a gambling business, it is essential to review your state’s laws, rules, and regulations, in order to avoid being characterized as an illegal gambling operation.

What is meant by “chance”?

“Chance” is some unpredictable random event – or X-factor—that can affect winning. It means something beyond the control of one of the individual participants.  If you roll dice or draw cards from a shuffled deck, there is an element of randomness–hence, chance is involved. There’s no way for you as a participant to control the fall of the dice or the card you draw. Though a good poker player or skilled card counter can significantly shift the odds in their favor, they can’t eliminate chance—the cards could simply come up wrong.

State laws differ with regard to the “level” of chance required to make an activity gambling. Some states require that chance predominate over skill: the outcome requires more chance than player skill. In a few other states, any degree of chance whatsoever in determining the outcome of the game can turn the activity into gambling. Some states following the dominate factor test have in fact found that poker is not gambling because researchers have found that, statistically, a good poker player wins more often than not—which means that while chance is a factor, it can’t be the main one.

Sports wagering: Isn’t the outcome of, say, a football game, based on the skill of the players? And if so, why is betting on it gambling? Because the outcome of the game is beyond the control of anyone other than the players. When you bet on your home team to win, no matter how hard you cheer, you can’t affect who wins and who loses. The outcome is uncertain and is as beyond your control as would be the fall of the dice or the draw of the cards—it is effectively, from your point of view, random or chance.

That said, “chance” doesn’t mean that you don’t have some input into the outcome of your bet. Someone who follows football can certainly pick the team more likely to win; someone who knows the basic rules of blackjack or poker and has even the faintest notion of probability can make more intelligent bets than someone who doesn’t. But no matter, how you shade or trim the odds, in the end, there’s a certain amount of luck you can’t eliminate, and that makes it chance for this purpose.

What is “consideration”?

“Consideration” is loosely defined as “something” of value which you put up or in to participate in the activity. (It is what you lose or give up if you lose the bet.) This is most often money, whether in the form of cash, a check, an electronic funds transfer, a money order, etc. Any currency will serve as consideration, including cryptocurrency (e.g. Bitcoins, Litecoin). Cash equivalents, like pre-paid debit or merchandise gift cards, certainly qualify as consideration.

But consideration is not limited to money (read our article on “Does Cash Have to Change Hands for It To Be Gambling” for more information). It can be anything which has a value. Securities (stocks and bonds) are one obvious example of a non-cash asset, as is jewelry. Intangible property also has value:  a trademark, for example, or a patent or copyright.

The right to do or receive something of value itself has value and serves as consideration. If someone owes you money, and he proposes a wager for “double or nothing,” your agreement — to give up your right to collect from him if he wins —  is consideration, because giving up the right to receive money is the same thing as giving up the money itself.

Is it consideration if there is no official value: Something can have value and be consideration even if it does not officially have value, but you could reasonably expect to find someone willing to pay for it. For example, some people have supplemented their income by “farming gold” in the World of Warcraft game. They would accumulate in-game treasure, then sell it to someone else to use in the game for real-world cash. Since there was a market for WoW gold, and therefore virtual gold could be converted to actual money, WoW gold could be consideration.

Overpaying consideration: You can even find consideration if you “officially” are buying something else but are overpaying for it. The amount of the overpayment is the consideration. That’s how gambling in internet cafes works. On paper, customers are buying internet access, but they overpay for the amount of access they actually use. That overpayment, whether it is in the form of paying a higher per-minute rate than the online time really costs, or whether it is buying excess time beyond what the customer will use, provided the consideration for the café’s gambling.

If you bet or wager anything of value, you may be gambling. And the value does not need to be any amount that a person would actually consider “valuable”—it’s enough that it has some value, no matter how slight. So if you say to your friend, “I bet that John over there can’t sink that shot,” that’s not gambling, since you haven’t put anything up—but if say to him, “I bet you this French fry that John can’t sink that shot,” that may be gambling if the other criteria are met. A French fry’s value may be trivial, but there is some worth to it.

What is “prize”?

Prize is the opposite of consideration in a sense, even though it is still anything of value. The “prize” is the thing of value you get or receive if you win the bet. And as with consideration, anything of value (cash, a real object, an intangible or virtual object, tickets, a trip, a right or promise to do something, etc.) can qualify as a prize.

The same concepts discussed on consideration apply to prize. Essentially, if something could, even circuitously, be converted to cash or a cash equivalent, or if someone might pay for that thing, it may qualify as a prize for gambling purposes. So if you stand to win something other than the respect or acclaim of your friends or “bragging” rights, that thing you may win is the prize.

Chance, consideration, & prize: When all are present, you have gambling

If you wager or bet something of value, in hopes of winning something else of value, and the outcome of the wager or bet is at least partly outside of your control or comes down to chance, then you have gambling.

That means that if you want to not have gambling and so not fall under the laws prohibiting gambling, you need to eliminate one of the elements. You can eliminate consideration: for example, have a “no entry required” sweepstakes. You can eliminate prize: for example, a “casino night” fund raiser where the play money you buy to gamble with is not redeemable for anything of value (i.e., it’s basically “Monopoly money”). Or you can eliminate chance by making a contest a pure game of skill, where the better man or women wins every time.

Case Studies: Exploring the Interpretation of Chance, Consideration, and Prize in Gambling

Case Study 1: Online Poker Regulation

In the state of New York, the interpretation of chance, consideration, and prize has led to a legal battle over the classification of online poker. A group of online poker operators challenged the state’s definition of gambling, arguing that skill plays a substantial role in determining the outcome of the game.

They presented evidence showing that professional poker players consistently outperform novice players, indicating that skill is the dominant factor in online poker. The case raised questions about the application of existing gambling laws to online platforms and whether online poker should be regulated differently than traditional forms of gambling.

Case Study 2: Fantasy Sports Betting

In California, the legality of fantasy sports betting has been a topic of debate. Fantasy sports involve creating virtual teams based on real players and competing against other participants. Several major fantasy sports operators faced legal challenges, claiming that their activities constitute gambling.

The case focused on whether chance or skill predominates in fantasy sports and whether the entry fees and prizes offered in such contests meet the criteria of consideration and prize. The outcome of this case had implications for the future regulation of the fantasy sports industry and the distinction between games of skill and games of chance.

Case Study 3: Internet Cafés and Sweepstakes

Internet cafes that offer customers the opportunity to play computer-based games have faced legal scrutiny in various states. In one case, a state prosecutor investigated an internet cafe that operated sweepstakes games, where customers could purchase internet access time and receive entries to play for prizes.

The case centered around whether the purchase of internet access constituted consideration for the sweepstakes and if chance was the predominant factor in determining the outcome. The case highlighted the need for clearer regulations regarding sweepstakes and internet cafe operations to address concerns about potential illegal gambling activities.