Wednesday, May 20, 2009

“Fear and Loathing in Las Vegas: Evidence from Blackjack Tables,” finds that players incur substantial losses by playing too conservatively

TO BE NOTED: From the WSJ:

‘Tis Better to Have Bet and Lost

Regrets always have a bitter taste, and those involving gambling tend to linger more than most. But a new paper argues that worrying about regrets may be costing you money.

Regrets: I have a few. Too few to mention… and too few to win big. (Associated Press)

Bruce Ian Carlin of UCLA’s Anderson Graduate School of Management and David T. Robinson of Duke University’s Fuqua School of Business look at how regret affects economic actions in market settings. Their paper, titled “Fear and Loathing in Las Vegas: Evidence from Blackjack Tables,” finds that players incur substantial losses by playing too conservatively.

The authors were able to field test the idea of regret using blackjack tables. Without the participants knowledge, Carlin and Robinson tracked Blackjack bets. The researchers found that more money was lost by playing too conservatively than too aggressively.

The finding tracks with psychologists’ theories about regret. People tend to act more conservatively if there is a chance they will regret their actions. They point to an example of two investors, one who loses money because he failed to sell his shares and another who loses money because he sold his shares. Even if the losses are the same, the second investor feels more regret because he took direct action. The other investor can blame forces beyond his control and doesn’t have to take direct responsibility.

Blackjack offers a useful case study, because there is a basic strategy that produces optimal results. “Players in single-hand deals who followed the basic strategy won 48.1% of the time, very close to the theoretical win rate reported in Blackjack guides. Deviators won only 36.6% of the time, which is statistically significantly lower,” the researchers wrote. “Players that followed the basic strategy won total of over $60,000, while they lost only about $56,000 following the basic strategy. In contrast, only $3,000 was won, and over $6,000 lost in hands that deviated from the basic strategy.”

Carlin and Robinson noted two ways bettors could deviate, either through passive actions (staying pat when you should have taken another card) or aggressive actions (taking a hit instead of holding). They found that not only were passive mistakes more common, but they were more costly as well.

The study has wider implications about the problem of risk aversion. Carlin said that it could lead to inertia in businesses as well as among individual investors. Take the recent drop-off in the stock market. “A lot of older people should have seen the risk of volatility earlier and should have rebalanced their portfolio. But they worried that if they sold and market rebounded they would feel more awful than if market just goes down,” he said.

Carlin points out the problem may even be more severe in the general population. By definition, Blackjack players are gamblers. “This is the behavior among risk seekers,” Carlin said. “Imagine what it looks like among the risk averse.”



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