HORSE-RACE BETTING AND RATIONALITY: PART 3

Continued from Part 2 on February 25, 2018

One of the most interesting findings from the research of psychologists Daniel Kahneman (Nobel Laureate in Economic Sciences) and the late Amos Tversky is that people generally want to avoid losses more than they desire to attain gains.  Michael Lewis provides examples in his book The Undoing Project.

Question 1:  Would you rather have $500 for sure or a 50-50 shot at $1,000?

Answer:  Overwhelmingly, people took the sure thing.

Question 2:  Which of the following do you prefer?

Gift A:  A lottery ticket that offers a 50 percent chance of losing $1,000

Gift B:  A certain loss of $500

Most people took the gamble and became “risk seekers.”

Lewis writes: “It was instantly obvious to them (Kahneman and Tversky) that if you stuck minus signs in front of these hypothetical gambles and asked people to reconsider them, they behaved differently than they had when faced with nothing but possible gains…  The odds that people demanded to accept a certain loss over the chance of some greater loss crudely mirrored the odds they demanded to forgo a certain gain for the chance of a greater gain.  For example, to get people to prefer a 50-50 chance of $1,000 over some certain gain, you had to lower the certain gain to around $370.  To get them to prefer a certain loss to a 50-50 chance of losing $1,000, you had to lower the loss to around $370.”

Thinking about these results, which were characteristic of a cross-section of people, I wonder if avid horse-race bettors mirror the results or behave differently.  Are such bettors wired to take more risks?  For instance, in Question 1, would they more than the general population opt for the 50-50 shot at $1,000 or at least require a certain monetary gain of more than $500?  In the second question, the vast majority of dedicated horseplayers would undoubtedly follow the normal response and risk-seek.

Assume a handicapper is at the racetrack with winnings of $500 going into the last race.  He or she can skip the race and leave a winner…or can bet some or all of the $500 with the potential to go home with much more.  The findings of Kahneman and Tversky would predict that most people would go home a winner of $500 or risk only a small part of the $500.

By contrast, if a bettor had lost $500 prior to the last race, he or she would be apt to risk-seek and take a shot at getting some or all of the money back.  This proclivity to risk-seek in the face of loss is precisely why people with a gambling addiction keep digging deeper holes for themselves.  A Las Vegas card dealer said she has seen people lose vast sums of money yet try to borrow more in order to recoup.  She felt sorry for one such individual and whispered to him (so her boss could not hear) to please quit betting.

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