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Some more thoughts on T&K loss aversion.
Jul. 2nd, 2005 01:16 pmTversky and Kahneman uncovered one of the most fascinating aspects of the human psyche by asking people two simple questions. In the first the respondents were asked to choose between a certain gain of $3,000, or an 80% chance of getting $4,000 and a 20% chance of getting nothing. A large majority of respondents chose the certainty of a $3,000 profit, even though the EV of taking the gamble was $3,200. In the second question they were asked to choose between a certain loss of $3,000, or an 80% chance of losing $4,000 and a 20% chance of losing nothing. In this case, most people (the SAME people) took the gamble, even though taking the certain loss had a better EV.
We might consider ourselves above such peasants, but, let's be honest, if it was a real situation, what would YOU do? And look at Nick Leeson, look at the companies (Independent Insurance, HIH, Mayflower) that struggled on even though it would be far better for them to have given up earlier.
It probably goes right into our hard wiring, back to the prehistoric days where two dead deer weren't that much better than one (because you could only eat so much before it went off), but losing that one dead deer might result in you going very hungry indeed.
Time and again I have to fight against this tendency when I am playing at higher stakes. When I am up, say $200, I want to protect the gain that I have, so I become risk averse, even when I should be taking on a +EV risk. But when I am down, I am willing to take these risks. This is bad play. It is playing "scared money". But psychological barriers are hard to overcome. We have to play tricks on ourselves.
I've found one way to do this (at least at the beginning of the month). If I am playing $15-$30, I am now setting myself a win target of $3,000 for the month. That way it doesn't matter if I go from $1,000 to $1,200, because I am still $2,800 short of my target. In other words, I am down rather than up. This, hopefully, prevents fatally hesitant or tentative play. Unfortunately, this doesn't get rid of the problem at the END of the month, when the desire to "protect" your certain gain becomes even stronger.
Unless through sheer force of will I can make myself play properly, the best solution I can see to this is to drop down a level or two and to multi-table. The hourly rate is pretty similar (in theory) and the volatility is much less. And the relatively lower stakes make me less "scared" because a lower proportion of my monthly profit is at risk.
I know that there are players out there who appear utterly invulnerable to the T&K psychological flaw, and good on 'em. But they are rarities (as T&K showed in their research!). For the humble, ordinary human beings among us, who suffer from prehistoric man's "what we have, we hold" desire, self-trickery may be the best solution.
We might consider ourselves above such peasants, but, let's be honest, if it was a real situation, what would YOU do? And look at Nick Leeson, look at the companies (Independent Insurance, HIH, Mayflower) that struggled on even though it would be far better for them to have given up earlier.
It probably goes right into our hard wiring, back to the prehistoric days where two dead deer weren't that much better than one (because you could only eat so much before it went off), but losing that one dead deer might result in you going very hungry indeed.
Time and again I have to fight against this tendency when I am playing at higher stakes. When I am up, say $200, I want to protect the gain that I have, so I become risk averse, even when I should be taking on a +EV risk. But when I am down, I am willing to take these risks. This is bad play. It is playing "scared money". But psychological barriers are hard to overcome. We have to play tricks on ourselves.
I've found one way to do this (at least at the beginning of the month). If I am playing $15-$30, I am now setting myself a win target of $3,000 for the month. That way it doesn't matter if I go from $1,000 to $1,200, because I am still $2,800 short of my target. In other words, I am down rather than up. This, hopefully, prevents fatally hesitant or tentative play. Unfortunately, this doesn't get rid of the problem at the END of the month, when the desire to "protect" your certain gain becomes even stronger.
Unless through sheer force of will I can make myself play properly, the best solution I can see to this is to drop down a level or two and to multi-table. The hourly rate is pretty similar (in theory) and the volatility is much less. And the relatively lower stakes make me less "scared" because a lower proportion of my monthly profit is at risk.
I know that there are players out there who appear utterly invulnerable to the T&K psychological flaw, and good on 'em. But they are rarities (as T&K showed in their research!). For the humble, ordinary human beings among us, who suffer from prehistoric man's "what we have, we hold" desire, self-trickery may be the best solution.
