January 30, 2012 Leave a comment
It seems like every-time I turn on the TV today, I see the latest craze of bingo adverts, ‘bet-in play’ gambling and of course the persistent national lottery. ‘It could be you’ is accompanied by seeing the flash sports car that could be won at the casino, the giant teddy you’d love to win your other half at the fairground, the £100 grand prize on the fruit machine.
In 2010/11, the licensed UK gambling industry took in proceeds of £5.5bn, and that is only a small proportion of what Brits spend gross, as the figure doesn’t account for payouts¹. Why is gambling, where house odds imply negative expected value, so compelling?
The type of gambling concerned shares the trait of a small, almost certain loss in return for a very remote, very large gain.
The National Lottery is most readily observable example of this, viz; the probability of winning the jackpot on The National Lottery, that is by drawing 6 number, is a staggering 14million to 1². In theory that implies if you were to go to your local shop to do a line per week, on average you’d wait 270000 years before you complete the set(4)! Note also that the process is totally random and beyond the players control, unlike perhaps sports events or trading (if you call that gambling) where sleight of hand is able to beat house odds consistently³, meaning a player is bound by this as a rule. Yet every week, millions of players across the country line up in fruitful anticipation that it could be them.
The massive jackpots of the Euro-millions draw many to play; here the odds are an astonishing 116million-1
Why we are compelled by the small certain loss-large unlikely gain gambles
Debunking rational economic man: There are various propositions as to why someone would gamble despite, how house odds are arranged, the expected value financially is negative.
Prospect Theory and Pascal’s Wager
As opposed to taking on the risk of a large loss for a small, certain unlikely payment, the gambling industry has equilibrated the vice versa, with more people willing to play the latter than the former. This results even in the example of when house odds are arranged more favourably in the ‘insurance’ game. The prominent behavioural psychologists Kahneman and Tversky provide an explanation of loss aversion; in their research they discovered that if someone were to lose £10000, the emotional intensity of hurt is twice that of pleasure if that person were to gain £10000. This when translated into the chance of a large loss on the cards, is a risk too much for most to stomach.
This can work in conjunction with Pascal’s wager, which implies that the consequences of a decision are the defining factor when the probabilities are unknown(5). The consequence of failure when its a small, almost certain loss is relatively easy to handle when going after a large prize. The consequence of failure on the flip-side is scary.
Once someone has began, they may continue to lay down their bets in the wake of a series of losses in the belief their ‘luck will balance out’ and the likelihood of winning rises to erase out past ‘bad luck’. They play along with the gamblers fallacy, believing that Karma is in operation and the ‘universe balances out, where in reality the odds remain fixed. But if I were to flip a coin and it landed tails seven consecutive times, it would now appear certain that a head must finally come up as it is overdue. Really, it is still 50/50 as it always was. This explains the allure of the Martingale Strategy, that a win is guaranteed if one doubles up on their previous losses.
Implications of Prospect Theory
Illusion of Control
Experiments conducted by the Harvard psychologist Ellen Langer have confirmed the hypothesis that people are wired to feel that they have control over events which are completely defined by chance alone(6): For example, if a person was presented with a completely random sequence of numbers, they would nevertheless have a tendency to identify a pattern and attempt to predict the next sequence. This is known as the ‘illusion of control’ which is applied to lotteries and casino games such as roulette.
Contemplate this experiment: Two groups, one in positions of ‘high power’ and ordinary individuals were asked to predict the outcome of rolling two dice. When presented with the option of rolling the dice themselves or having someone else roll for them, 100% of the ‘high powered’ group elected to roll themselves, as compared to roughly 70% of the ordinary group(7).
The opposite outcome of what may prompt Gamblers Fallacy is a series of wins which may prompt Hubris in the participant, encouraging more gambling. This is where the person overestimates their abilities as a result in games which are purely by chance (related to above) or some skill element involved:
Consider for instance in 1999, when the stock-market had climbed like a monkey on speed there was a remarkable increase in the number of people who had quit their jobs to become day-traders, especially in the US. With such confidence, some believed they had a special talent for stock picking due to their previous gains on internet companies, whereas the truth is if you had selected a monkey to pick stocks he wouldn’t have done any worse, as the conditions at the time meant it would be hard not to ‘perform’ well. Overestimation in their capabilities was a causal factor of greater gambles.
Peak End Experiences and Fading
A key final point; people remember peak experiences, such as a large win very vividly but forget experiences which are smaller in significance or negative in perception (the latter is called the Fading Effect). It is commonplace to have older people talk about these vivid peak wins in great esteem: For example how the legend of Red-Rum won them hundreds of pounds at the Grand National or how they were one of the few to predict Douglas beating Tyson. In contrast to pumped up endorphins on a large win, the small regular losses which chip away at ones account are often faded out of the memory. It is easy to see how someone arrives at the bookies with irrational optimism.
Why they keep us playing
Overall it is confirmed that cognitive biases are a driving force of the gambling industry, we are wired to lotteries, casinos and bingo; games where a small likely loss is exchanged for an improbable large gain. Peak end experiences, fading bias and prospect theory are how the house sets the game so you want to keep on playing: Few experiences are too harmful to leave emotional wounds with the punter despite the magnification of loss as compared to gain, because they are consistent and small. Wins are peak end experiences which the punter remembers for years thereafter. If one keeps losing on a game, gamblers fallacy can keep him playing. If one wins, hubris and overconfidence can keep him playing. The illusion of control and prevailing superstitions persist regardless.
So say goodbye to rational economic man, as if the world were populated by such actors the gambling industry would cease to exist. Oh yeah, and it can be fun too. Many love a day at the races, and remember with affection their childhood trips to the arcades!
- Unless one believes in the Efficient market Hypothesis
- By then, the National Lottery might not be around but surely something would have taken its place
- Assuming the average lottery player is unaware of the 14million-1 jackpot odds, in my view realistic
- Ellen J Langer, The Illusion of Control http://psycnet.apa.org/journals/psp/32/2/311/