Loss Aversion May Be Causing You To Lose

By | August 8, 2014

Being a consistent winner in sports gambling is extremely difficult.  Let’s assume you are one of the few bettors who has a winning system or you follow someone who does.  Is that really enough to be a winner?  Most people think so.  If you have the ability to beat the books on -110 bets more than 52.4% of the time that is a great start to winning but it’s not enough.

I have written often about money management.  Having proper money management is key to becoming a successful gambler.  But what about loss aversion?  Firstly, what is loss aversion?

As described in Usabilla

Loss aversion is a human characteristic that describes how people are intrinsically afraid of losses. When compared against each other people dislike losing more than they like winning. Thus losses loom larger than gains even though the value in monetary terms may be identical.

We see this behavior in all aspects of life and sports.  This study by Devin Pope and Maurice Schweitzer showed that professional golfers acted in a loss averse way when putting.  Golfers made a higher percentage of par putts from the same distance as they did birdie putts.  The thinking is missing a par putt is giving a stroke away therefore the golfers bear down more and try and make the putt.  On birdie putts the golfer feels like he has a par in his pocket and does not want to lose that so he makes sure he at least makes par by not being as aggressive.  Tiger Woods himself has talked about not wanting to give back a stroke so he bears down on par putts.  But isn’t that par putt just as important as the birdie putt?  They do not count a golf score by the number of pars they count every stroke equally.  5 bogeys 5 birdies and 8 pars is the same score as 18 pars.

In the book Scorecasting the authors studied the difference in 3-2 counts in baseball when the at bat started 0-2 and 3-0.  The difference in those two scenarios was interesting.  When pitchers faced a 3-2 count after starting 0-2 they were more aggressive than those who started 3-0.  Aggressiveness and risk were determined by the number of offspeed pitches thrown in that situation.  Fastballs tend to be safer and easier to control.  Pitchers also got more outs when they started 0-2 and went 3-2 than starting 3-0.  Pitchers viewed 0-2 as a “win” and did not want to “lose” what they perceived to already have.  Losing hurts more than winning so doing everything they can not to lose makes pitchers more aggressive.

Studies have shown that we value losses 1.5 to 2.5 times that of gains.  What hurts more, someone handing you $1,000 and then taking it away or never getting the $1,000 in the first place?  The end result is the same but the loss of the $1,000 after you had it hurts much more.

Have you ever tried to take something away from a small child that they weren’t even playing with?  That loss of item hurts far more than the gain of obtaining it.  You can see that once you give it back and they become tired of it moments later.  But the blood curdling screams when you took it away are frightening.

In a hypothetical situation we have two individuals that are identical in every way.  They earn the same, same assets, family etc.  Both are living comfortably and able to save a few bucks each month.  Now person A has a tragedy in their life.  They contract a disease that is life threatening.  They can no longer work, savings are depleted and they have to sell off their assets to pay for their expenses.  Miraculously A is cured but is left broke.  Out of work for years, no money and heaps of debt.  Which of these two has a greater likelihood of becoming wealthy?  Person A does.  Person B has a comfortable life and does not want to risk losing that.  Most wealth is created by risk takers.  Risk that may jeopardize what B already has.  Person B is averse to losses.  They worked hard for everything they have and losing it is just not an option.   A worked just as hard but lost it to circumstances out of their control.  There is far less aversion to loss so therefore they will take on riskier behavior which could possibly lead to great rewards.  No guarantee it will but if B takes zero risk then they have zero chance at the reward.

Having a bankroll in gambling is essential.  It helps the gambler be discipline but look how after looking at loss aversion it should be clear as to how else it helps.  Having money set aside or in an account is like starting with a loss right off the bat.  You physically had to take that cash out of the bank, your pocket, a mattress or wherever in order to put it in a gambling account.  You need to feel like every dollar is now gone.  That is not money you can use for vacation, a new car, watches etc.  That money is now spent.  You “lost” it.  In that simple move of putting that money somewhere you can not touch it, outside of gambling, you just cut off a lot of the emotional ties you may have had to it.

This is like going to the track and getting a $100 voucher to bet with.  That is now $100 spent and will not be seen again unless you win.  What do most people do when it is the last race and they have a few bucks on those vouchers?  They wager all of it.  No sense in betting $10 and having $4 left over.  They suddenly do not care as much about the potential loss because the feeling is it was lost already.

As a disciplined sports bettor we are going to use that feeling to our advantage.  We are not going to be overly aggressive after a losing NFL Sunday in the hopes to get it back in one shot because we have nothing to get back.  We are removing as much of that instinct to be more aggressive (starting with an 0-2 count) as we can.  The average bettor is loss averse and therefore has no problem betting 5x what they bet on the afternoon NFL games on the Sunday night game to try and get back to even.  Breaking even feels like a win when faced with a loss.  But of course they will not bet 5x what they bet on the early games after a winning session because they do not want to get back to even which would now feel like a loss.

This will also help us grow a bankroll when we are successful.  The instinct is to take the money off the table when winning so that we can’t lose.  There is no money to take.  It is in some account we promised not to touch.  It is just numbers at that point.  We can then compound our winnings by increasing our wager sizes in accordance with our bankroll.  Generally 1-2% of a bankroll is what should be wagered.  If after a season or even every month you reassess your account and change your unit size accordingly the successful bettor can start to increase their bankroll very quickly.

So much more goes in to being a winner than picking the right game.  The more we learn the better we become.

 

 

 

 

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