In his new book, Misbehaving: The Making of Behavioral Economics, economist Dr. Richard Thaler mentions a paper he wrote about risk aversion, or lack thereof, while gambling: “Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice”. In it, he describes how our gambling behavior may be altered based on what has happened in previous hands or turns.
Essentially, what Thaler finds is that gamblers may be more apt to make risky decisions when they are ahead. If, by chance, we are ahead, we feel we may have been lucky and, in essence, gambling for free or with the house’s money. Accordingly, bets with a higher house edge, those which have a higher payout and are ultimately more risky, may become more attractive.
What’s the most efficacious thing to do? That would be to stay the course. Bet the style in which you are comfortable. Make good bets while limiting your overall risk. There’s no reason to be less risk averse. You’re not gambling with the house’s money. A transaction has occurred and it is now your money. If we want to be better gamblers, increasing our overall take in the long run, it’s important to be aware of the psychology surrounding our habits and quirks.
I should note that there are times in which certain bets should be increased, but they are not related to bankroll size. Good blackjack strategy requires a bet to be altered based on particular situations. This is for more advanced players though. Casual gamblers, economically speaking, would be best keeping their bets consistent to minimize volatility and risk, no matter the state of the bankroll.
This advice would probably be good for those who’ve suffered a moderate loss as well. The prospect of breaking even is also a circumstance in which we may feel we need to make a more risky play. Statistically, however, we are still more likely to lose than win. Kind of a sobering remark, but true nonetheless.
Ultimately, this advice is easier to discuss than follow. Take any advice from me or a Phd holding economist how you see fit. I gamble to have a good time, and I’m assuming and hoping you do as well. Nevertheless, I don’t want to lose more money than is necessary to have that good time. Understanding the common fallacies and gambling mentalities is necessary to become a better gambler. As always though, just go out there and have some responsible fun, however you choose to do it.