Are behavioral finance principles relevant in the context of gambling?

[concertrate]

At uni I did a research project on something called the disposition effect. This is the theory that people sell off their winners or profitable stocks before the peak and hold on to the losers or loss making stocks too long.

 

I see something similar in my own play. When I tend to cash out or withdraw or even just stop for the day, it is usually when I’m only a little up, but when I’m on a losing streak I keep chasing and chasing in the hope that it will turn and then eventually bust. This is clearly not optimal, but it is human behavior that was shown to be present in certain exchanges in more developed countries.

Interested to find out if you do the same or if you’re disciplined enough to cut and run when you’re sitting on some fat profit!

[hustler1984]

personally i dont wd small amounts.... but i can definitely see that being a traite of some gamblers... 

[wry]

First off, behavioral finance and economics is simply the realization by economists and finance academics that, surprise!, people are not rational.  Therefore, they borrow from other academic disciplines, such as psychology, sociology, and organization behavior to explain things.   

So absolutely!  Ideas they discuss apply to gambling, it's just that they are really not that new.  Consider your disposition effect, it is true, no doubt, but why?  Well because of how we frame things, we tend to be more aggressive in avoiding losses, you havn't lost money until you sell, so we don't.  It can also be related to escalation of commitment - increasing your dedication to a losing course of action - witness how many people increase their bets when they lose, the martingale "strategy" legitimizes this.  With disposition it's not as strong, but it's similar, you've lost money, say in Bitcoin, yet you hang on hoping for the price to pump back up, you're more committed despite the fact that it is not working out.

So YES, I think they are absolutely relevant and I think you'll find lots of examples not only in people's play but also in their chat!  So great choice in your classes!  Happy Hunting!

 

[concertrate]

Completely agree with this comment wryy. I also think there are a range of other theories, hypotheses and effects that hold true in the gambling world. After all, isn't trading just a more calculable form of gambling? Working in M&A/ Corporate Finance and having learnt the theory back in the day, the theory sets a good base, but there is so much more at play that at the end of the day market sentiment is the more significant driver of prices - same with BTC and other crypto especially because of its novelty and the lack of generally accepted valuation or measurement principles in this arena...

[polor12]

money management basically the topic right.. if it is then gambling will never fit.. you make profit.. you won't stop because you wanna see if you can make more.. if you loose that profit it makes you want to play more to gain that profit back..

[williamshennie9]

From experience, people hold onto losing positions because they think the trend will reverse and that they will recover their losses, and at the same time, people withdraw profits pre-maturely because they think the trend will reverse (since they have already made profit).

Usually this is a recipe for disaster, but for many of us, it is embedded into how we gamble and invest.

[Shaniqua]

On 12/12/2018 at 1:54 PM, hustler1984 said:

personally i dont wd small amounts.... but i can definitely see that being a traite of some gamblers... 

likewise,                         
im curious how much relevant or relative to your depo do u get to b4 you wd?

[concertrate]

On 12/13/2018 at 4:02 PM, polor12 said:

money management basically the topic right.. if it is then gambling will never fit.. you make profit.. you won't stop because you wanna see if you can make more.. if you loose that profit it makes you want to play more to gain that profit back..

 

On 12/13/2018 at 3:11 PM, blurrijs said:

It's also same for me, I try to make profit and then stop when I make it, but if I lose then I keep betting untill I make profit, or bust all

 

On 12/13/2018 at 4:30 PM, williamshennie9 said:

From experience, people hold onto losing positions because they think the trend will reverse and that they will recover their losses, and at the same time, people withdraw profits pre-maturely because they think the trend will reverse (since they have already made profit).

Usually this is a recipe for disaster, but for many of us, it is embedded into how we gamble and invest.

It’s sad but true, human nature hey.

 

Anyone see any research with empirical evidence on this behavior? Will check to see if there is anything also.

[KiXxnTRiXx]

 whoa hahah, im guilty of holding on and hoping for things to turn around. i mean, it makes sense in a way that eventually you will start to hit green.. the only problem is when that is.. ive had it both ways where ive waited and waited but kept on busting.. then there are times after busting a few times, that everything finally was hitting and end up winning more than what ive lost.. of course this scenario are not always going to happen, but when it does, it makes it all worth it.. just gotta live through the headaches tis all..

[concertrate]

8 hours ago, KiXxnTRiXx said:

 whoa hahah, im guilty of holding on and hoping for things to turn around. i mean, it makes sense in a way that eventually you will start to hit green.. the only problem is when that is.. ive had it both ways where ive waited and waited but kept on busting.. then there are times after busting a few times, that everything finally was hitting and end up winning more than what ive lost.. of course this scenario are not always going to happen, but when it does, it makes it all worth it.. just gotta live through the headaches tis all..

Yeah I’m the same, but with the house edge Im down in the long run sadly!

[Stevenwonder]

I think it all is about the mindset going into the particular session by the individual that is, of course, the ultimate factor. I call it “the theory of flawed trajectory” in what you are describing. Here’s what I mean by that:

 

In most situations there is always a floor and there is always a ceiling.  That could be from a physical level (as in an actual floor or an actual ceiling) to a figurative aspect (i.e. climbing a corporate ladder from entry-level to CEO) Most situations like this have people in a psychological limit of accomplishing reaching the highest level. As such, you don’t see people trying to break through a ceiling because they want to see what it is like above the ceiling or in the figurative example I gave, you don’t see people trying to get past a CEO level of a company since that’s the highest position in a company. 

 

Those ideas in mind, gambling is a lot different. When you deposit and play, there is no cap to what you can win. You could win 22 million Bitcoin and you’d probably think that Stake would pay you the equivalent of 1 million in other crypto. That trajectory of course is exaggerated but the basis of the idea is that you know where your floor is, which is 0, but your ceiling can’t be rationalized because there are no limitations. Stake doesn’t say “you can only win 2x your deposit then you automatically have to cashout” otherwise they wouldn’t be in business because they, just like every other casino, depend on your irrational thinking to make their money. They want you to win just enough to make you think you can win more, because that’s when you start to lose. And when you lose, your mind starts to panic. If you deposit one bitcoin and all of a sudden you go from one to two, then lose to go back down to one, chances are you have 2 stuck in your head. You feel like a loser if you don’t get back to that number you once had. You got there before, so you can get there again. And if luck comes your way with getting back to two, your mind has now set that as your starting point and odds are you won’t cash out anything less than 2 bitcoin. 

 

That’s basically what my theory is on flawed trajectories and how it perfectly aligns with what you are describing.