[Intro] Behavioural biases in gambling - a finance perspective

[concertrate]

As promised, I will be doing a series on behavioural biases in gambling based on the phenomena identified in financial markets. Before I start though I thought it would be good to set out my reasoning behind this and what it is that I will be covering.

What is behavioural finance?

The Corporate Finance Institute does a good job of summarising this. Here is how they define it:

Quote

Behavioral finance is the study of the influence of psychology on the behavior of investors or financial analysts. It also includes the subsequent effects on the markets. It focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases.

Why gambling vs investing?

While gambling and investing are different activities one key aspect, speculation (effectively betting on an outcome - be it a boom or bust), is a clear commonality. The mindset of traders and speculators can also be likened to that of gamblers where they hope to achieve a certain outcome. The strategic aspects in gambling and investing are both numerically based on the expected value of an outcome (some of the strategies I have seen use the principle of expected value as well). My discussion will however focus more on why we do things in certain ways which aren't always logical (i.e. why we act irrationally in certain circumstances). For example why we will go all in on a long-shot when we get rain/tips/coupons.... This is related to something called the house money effect which will be the first bias I cover.

Given the significance and magnitude of financial markets, there has been extensive research done in the area of  behavioural finance and investigation into various cognitive biases of investors. Given the similarity noted between these two activities, I will be explaining some of these behavioural biases in the context of gambling.

I will be updating this topic as I cover new topics with links to the various biases below.

I hope you enjoy this series and I would be grateful for any and all feedback.

 

List of topics:

• House-money effect: https://forum.stake.com/topic/23678-part-1-behavioural-biases-in-gambling-the-house-money-effect/
• Self-attribution Bias: [coming soon]
• Gamblers' fallacy: [coming soon]
   

A little about me for those who doubt my credentials

• Degree in finance with research focused on behavioural finance
• Post-graduate studies in finance and accounting
• Former finance lecturer
• Extensive international experience in capital markets, valuations and M&A at one of the largest multinational firms

[CntryBoy]

So much good information, thank you very much for sharing.  I am looking forward to the follow up info as well.

[Enzo]

I already read Part 1 and must've got you mixed up with someone else on the other post.

Great info here and i'll be sure to put some thought into how I behave when I gamble.

[williamshennie9]

I think that another reason why people gamble over investing is that the results are almost instant. I can literally take my entire income, and put it down on a game of blackjack. Within 10 seconds I can double it. Investing takes more time.