With the rise of online gambling, it is now possible to place bets and win—or lose—large sums of money all in the privacy of your own home, office or car at offshore sportsbooks. Separated completely from the hive of activity in a brick-and-mortar casino, it can be easy to forget that gambling, at its core, is a group activity.
While the bettor is making the decision on which wagers to make, which side of it to pick and how much to risk, all solo activities, the environment in which he or she is making those bets is influenced heavily by the actions of others. Lines change constantly, based on betting activity. In other words, you, the bettor, might be pushing the cart up and down the supermarket aisles all alone, but the prices of everything on the shelves has been set by thousands of other shoppers who came before you.
Why does that matter? Because a knowledge of human behavior can help make you a better gambler.
What Is Behavioral Economics?
Behavioral economics is a field that combines psychology and economics. It is a study of why people behave the way they do and make real-world decisions. It should come as no surprise that people don’t always make the optimal decision for themselves, and a knowledge of research and findings in the behavioral economics field can help you take advantage of the inefficiencies created by sub-optimal decisions.
How Low Is Too Low?
When you get right down to it, gambling, in and of itself, is a sub-optimal decision. The odds are against you—the old saying says that the house always wins, and the house edge means that, if you bet long enough, you’re going to lose.
So why play? Because you might win. Expected value is no fun, so we ignore that—which says we’re going to end up losing in the long run—and focus on the high payouts associated with low probability events. It’s the whole basis for the lottery. Research has shown that people just can’t comprehend how low their chances are of winning, so they take a chance in order to win the billion-dollar jackpot. People regularly overweight the chances of low-probability events occurring. It’s why we refuse to fly because of the danger of a plane crash, or stay out of the water to avoid shark attacks. And it’s why we put all our money on 23 at the roulette table.
Because if It Happens…
A study of horse race players has shown that, if you bet the horse with the best odds of winning consistently, you’ll earn more money than trying to pick the long shot. But the dream of a horseplayer isn’t just to make money, it’s to pick the long shot and have it pay off.
Loss Aversion
Football and basketball coaches say all the time that the thrill they get from winning a game is nowhere near as rewarding as the pain they feel from a loss. The same is true of gamblers.
Losing money is more painful than winning it. It’s why casinos will give you an upfront bonus, so you “start off ahead” and aren’t thinking about how you lost some of your hard earned money right off the bat. It’s also why people will chase losses, in the hopes of wiping out the pain they just felt by getting it all back at once.
Dunning-Kruger
The Dunning-Kruger effect essentially says that most of us aren’t as smart as we think we are. If you look at a graph of performance on any task, people are distributed across the spectrum of outcomes. A graph of performance against the percentile you fall in would be a 45 degree line, with the lower percentiles scoring low and the higher percentiles scoring high. That’s not the interesting part.
What’s interesting is that if you overlay it with a graph of people’s self-perception of their ability, it’s a much flatter line. And EVERYONE thinks they’re better than average. That means that the people in the lowest percentiles THINK they are a little above the 50th percentile. So they are far overestimating their ability at the task. People at the 50th percentile think they’re in about the 60th percentile, so they still overestimate their performance, but by much less of a spread. And the elite performers in the highest percentiles actually underestimate how good they are.
You Are Not Alone
Why does this matter? Because those are the people helping set the lines. The worst gamblers are irrationally overconfident in their ability to win. This is important to know when evaluating sudden large changes in odds. Does the wisdom of crowds apply, and people know something about what’s about to happen? Or are the people in the lower percentile suddenly going with their gut? And, when you’re going with your gut, be aware that, despite your near-total confidence that you’re right, you actually have no idea where on that Dunning-Kruger diagram you’re currently sitting.
Takeaways
Following the herd can be a red flag, because Dunning-Kruger assures that more than half the herd is far more confident in their ability to pick winners than they should be. Also, take extra care to make sure you put any losses in perspective and avoid the temptation to win back what you’ve already lost.
Finally, realize that the best strategy is often to pick the boring favorite, even if it means not getting the “cash in on a long shot” moment we all crave.
