Most of us know that our brains are a complex morass of neurons and lobes, pathways and connections; but perhaps not as many of us are aware how much these cerebral roadways direct our gambling decisions. An international best-selling book by a Nobel Prize winner in Economics may give us more insight, however, so let’s explore some of these fascinating findings based on this cutting-edge research; it might even help you win more (or, at least, lose less).
Nobel Prize Winner Weighs In
The research comes from world-renowned psychologist Daniel Kahneman, whose 2002 Nobel Prize in Economic Sciences should give him pretty solid street cred in this arena. In his New York Times bestselling book, “Thinking, Fast and Slow”, Kahneman details the two systems that drive our thought patterns, and which can certainly extend to our gambling decisions as well.
Kahneman says these two systems are as follows: System 1 is quick, intuitive and emotion-based, while System 2 is more deliberate and takes its time, while employing more logic. According to the author, these two cognitive approaches color every decision we make, from deciding on future career paths to assessing when to bail from the stock market – and obviously encompassed in that broad spectrum are things like when we go to casinos (on line or on land), how much we determine as our bankroll, what games we play, where we play them, and when we decide to cash out, whether as winners or losers.
Not So Smart
Kahneman maintains that our own mental cues sometimes trick us into thinking we are making wiser financial decisions than we really are. He says based on our own wishful thinking and prior good luck, events become erroneously linked in our minds; (something like, “I was playing at X Casino when I won, so that is where I should always play,” for example), and even emotional memories (for instance, you met your beautiful girlfriend while at the bar at X Casino). Kahneman says this fallacious thinking does not often lead to good decisions or financial benefit, something which could certainly be applied to gambling ventures and their outcomes.
But let’s get specific. Suppose you were offered the following options:
a) 100% chance of winning $800,000
b) an 80% chance of winning $1,000,000, with a 20% chance of winning nothing.
Almost all of us would take the sure thing, right?
But now, turn those possibilities around and see how the picture suddenly changes:
Now you have a:
a) 100% chance of losing $800,000
b) an 80% chance of losing $1,000,000 and a 20% chance of losing nothing;
now, most of us will take a shot, scared by the horrifying certainty of losing a fortune.
While it may seem like semantics, these possible scenarios demonstrate the difference between being “risk averse” and being “loss averse.” Essentially, most people will not take a risk to get super rich, but will take a decided risk to not end up in the poorhouse at the end of the day.
Kahneman’s theories also note that the part of the brain that links together chains of events – let’s say, you went to X Casino, you sat down at a specific slot machine, you played with quarters, and you won a jackpot – can cause your individual projected probability for these occurrences reoccurring as possibly as high as 90 percent, whereas the actual likelihood of your anticipated outcome is something more akin to 66 percent. Yet most of us are making decisions based on our fantasy, not on mathematically accurate projections.
Similarly, the author says our brain memories impact us differently based on outcome. So, for example, losses will tend to weigh in more vividly in our mind’s eye than wins. Another fascinating finding relates to peoples’ risk in “real life,” versus in their financial lives; typically, it seems, there is not a definitive correlation between the two.
For example, you may like to hang glide and race cars, but could still be a tight player at the poker tables and the first to cash out with a small win at a slot machine. You also might not really be looking at the bigger picture when you make your gambling decisions, for example:
a) if you win the $50,000 jackpot, you could pay off your student loans
b) if you lose $1,000 trying to win that $50,000, you might not be able to pay your rent this month.
In other words, keeping the total picture of risk vs. reward in mind could help you make better decisions overall when you are gambling.
Safety Vs. Certainty
Another key point is that people tend to confuse what they perceive as “safe” financial decisions with “certain” financial decisions, and all of these have potential consequences. A perfect example would be the typical fairly well-heeled employee of say, 10 years ago, regularly contributing to their 401(k) matched accounts at work, assuming this will inevitably lead to a safe and secure retirement. Then along comes the recession, and many of these supposedly “solid as a rock” retirement funds lost as much as 40 percent (or more) of their implied value, and many people essentially had to start from scratch, while others nearing retirement no longer could afford to do so.
These people assumed they were safe, but were not, and made decisions based solely on these false assumptions.
And what about the long term? Gamblers, overall, tend to have a lot of impulsiveness, to be caught up in the intoxicating excitement of the moment, whether it’s betting on a horse, a craps game or blackjack. Suddenly, long-term consequences be damned, and we think only for the “now”; obviously, often with disastrous consequences. Most people who say “I’ll worry about that when it happens” find out the hard way, when it does happen, that the worrying is not very pleasant at all. Will that color their decisions the next time they are in a similar situation? Possibly; but if it always held true, you wouldn’t see gamblers losing millions, their home and families, and even getting jail time as the result of clearly having made the same not very good decisions time and time and time again.
What can we, as gamblers, take away from all this information? One thing is that there are no absolutes in life, and some risk must be embraced no matter what you do. You might drive due to your fear of flying, then be hit by an oncoming truck and die. We cannot accurately predict everything that our decisions – financial and otherwise – will affect down the road based on our actions today. But we can, at least, slow down, think it through, weigh our options, and then make an informed decision.
Unless you’re playing No Limit Hold’em in Vegas; then please hurry up and play your hand or fold already, we don’t have all day.