Paradox - Jun 2012

Casino is an interesting place to observe the behaviors of people. Have you ever wondered why some people will choose to leave, but some will still remain in the table while they have won or lost the same amount of money?

$100 is not the same as $100

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The Prospect Theory gives an explanation to certain behaviors of gamblers. The theory suggests when people are facing uncertainty, they will make decisions based on the potential value of losses and gains, but not the final outcome. That means people will set a standard for them to make decisions, then they will calculate the difference between this standard and their every expected result. For example, a man expected to win $200 in a table. Finally he won $200 but he will not be surprised with that. When he got a chance to win more than $200, he will consider it carefully in order not to lose his expected $200. While he will not consider another safety way to win $100 as it is not his expected result.

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There is a standard in people’s mind. That the impact from winning and losing the same amount of money is different. For example, a man expected to win $500 in a table with $2000 capital. After he won $500 that will be nothing for him but when he lost $500, he will be frustrated because the actual difference is not $2000 - $1500 = $500, it should be $2500 - $1500 = $1000. In an easy way, the frustration caused by losing is greater than the surprise caused by winning.

In another word, the best way to make you happy in a casino will be: take away all your capital after the first win; use the money from first win as a new capital; take away a little amount into your pocket after each win; retreat when the new capital lost to certain amount. There is only one discipline for gamblers in the casino: nothing is more than winning.

Anthony Chan

Reference:
Kahneman D, Versky A (1979) "Prospect Theory: An Analysis of Decision under Risk", Econometrica, XLVII (1979), 263-291