- Is gambling irrational?
- How does overconfidence influence betting decisions?
- Can both the buyer and seller get a good deal?
For proponents of rational choice theory, the phenomenon of gambling poses a perplexing issue. It is generally accepted that individuals make decisions with the aim to maximize benefits while minimizing losses. For instance, one wouldn't spend €1,000 on a vacation perceived to be worth merely €500. Hence, if a wager comes with an expected value of zero or less, what drives gamblers to place such bets? Continue reading to uncover the reasons.
The enigma of gambling psychology is intricate, yet at its core lies a straightforward query: if gamblers tend to lose money on average, what fuels their interest in gambling? In this discourse, we shall delve into the misunderstanding around expected value and elucidate why mathematical expectation and the attractiveness (or desirability) of an outcome don't always align.
Is gambling irrational?
In most gambling forms, like casino plays and lotteries, the expected outcome is usually negative. This holds true for a vast number of sports bettors, for whom the probability of outcomes isn't mathematically deduced from first principles, leading to a similarly unprofitable expectation.
Considering the costs involved – the house advantage, the poker rake, and the bookie's margin, to name a few – the average gambler tends to lose money over time. While short-term luck might result in gains, the principle of large numbers eventually prevails, defeating even the most fortunate players.
Our flawed ability to accurately assess probabilities is just one among many cognitive biases that derail us from making rational choices. Thus, it could be argued that gambling exemplifies irrational conduct. Moreover, ample evidence suggests that players fail to grasp the probabilities underlying their decisions.
A prime illustration of this is the Possibility and Certainty Effects, where decision-makers give undue importance to the likelihood of rare and almost certain events, respectively. In gambling, this leads to the favorite–longshot bias, where longshots offer a relatively poorer expected value compared to favorites.
This inability to accurately evaluate probabilities is a cognitive bias leading us away from rational decision-making, especially in gambling, giving rise to another significant bias: overconfidence.
Overconfidence
Overconfidence, or the illusion of superiority, is a cognitive distortion where individuals overvalue their own attributes and capabilities relative to others. In the competitive realm of gambling, and particularly in sports betting where individuals' analytical skills are pitted against one another, overconfidence is expectedly widespread.
Referred to as the Lake Wobegon effect, named after a fictional locale in Minnesota, it highlights our innate tendency to overrate our competencies. In Lake Wobegon, the women are robust, the men are handsome, and all the children exceed average standards. This phenomenon, where the majority believe they're above average, is evident across various fields, including social standing, intellect, and driving abilities.
Odds merely mirror the collective private views on the likelihood of outcomes, represented through financial stakes. The Lake Wobegon effect is notably present among sports betting advisors. According to the 1976/77 (US) College Board Student Descriptive Questionnaire, a significant portion of high-school seniors perceived themselves as above average in athleticism, leadership, and sociability, revealing a stark disconnect from reality.
Who's buying when you're selling?
Daniel Kahneman, in his renowned work Thinking, Fast and Slow, recounts a discussion with a Wall Street investment manager, particularly focusing on the question, "When you sell a stock, who buys it?" Essentially, what differentiates the buyer's and seller's perspectives? What insights do sellers believe they possess that buyers lack?
Clearly, one party must be more mistaken than the other, unless every transaction mirrors the 'true' value, eliminating any profit. This scenario would indeed be irrational. The mutual transaction, driven by both parties' overconfidence in their ability to judge a stock's value, explains their willingness to engage.
Awareness of a bookmaker's fees or the reasons behind our betting habits doesn't diminish the pleasure derived from it; rather, it steers us towards identifying expected value. Likewise in betting, odds broadly represent the likelihood of an outcome. No one would wager 1.05 (or 1/20) on Sutton United defeating Arsenal FC, irrespective of opinions on Arsène Wenger. The odds are a collective reflection of all private opinions on the outcome's probability, expressed in monetary terms.
The final odds are the result of a tacit bargaining process. Both the backer (buyer) and layer (seller) naturally have an approximate price in mind that seems fair. Overconfidence then convinces both parties they've managed to secure a favorable expected value, an inherently illogical conclusion.
Without such overconfidence, the wager wouldn't occur, as both parties, motivated by rational self-interest and the belief in superior information, aim to profit rather than frivolously spend money.
What about those on the outside looking in?
While irrationality, overconfidence and other behavioral biases may explain why we bet, it doesn’t necessarily mean they can control how we bet. With an understanding of what these behavioral biases mean and that to some degree, they influence everyone; bettors can take an “outside looking in” view.
Knowing how behavioral biases influence betting decisions and being able to calculate betting margins doesn’t detract from the enjoyment it can bring, it simply sets you on the right path to finding expected value and taking a more educated approach to betting.
The obvious question that arises from this article is: what is it that breeds such overconfidence in a betting context? What makes bettors so sure that they are right?
Now you know how the irrationality and overconfidence will affect you while gambling. Sign Up Now or click HERE to play at 7x7Bets, the most reliable and trustworthy online casino in India. Don't forget to claim your withdrawable real money welcome deposit bonus, weekly cashback bonus and referral bonus!
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