For believers in rational choice theory, gambling is a headache. Everyone is expected to make rational choices to maximize their profits while minimizing their losses. The most obvious question about betting is:
If on average bettors lose money, why do they still want to bet? This article explores the lack of understanding of expectations and why mathematical expectations and actual needs (or desires) do not always mean the same thing.
Is gambling not rational?
For most types of betting, including casino games and lotteries, expectations are negative. Most bettors do not mathematically calculate the odds of the outcome and do not seem to expect that they will make a profit.
Once the cost of betting is taken into account, such as the house edge and the bookmaker’s profit. The average bettor will lose money after betting for a period of time. Even if they can make a profit in the short term. The law of large numbers will eventually lead to a loss, even for the luckiest players.
On this basis, it is reasonable to say that gambling is not rational behavior. There is also much evidence that players do not understand the odds behind their decisions.
Specific examples of the above statement include likelihood and certainty effects. When estimating the probability of an event, the decision maker will overestimate the unlikely event and underestimate the almost certain event. In betting, the most obvious is the hot – cold bias, where the expectation of a cold option is worse than a hot option.
We have a variety of cognitive biases, and lack of ability to correctly estimate odds is just one of them. It causes us to deviate from rational choices. In the world of betting, arguably a potentially more serious bias can arise: overconfidence.
Overconfidence
Overconfidence or the illusion of superiority is a cognitive bias. It is the overestimation of one’s own attributes and abilities and the belief that one is superior to others. Because of the competitive environment of betting, with the competing analyses of forecasters, we can expect overconfidence to be a common phenomenon.
Assuming that both sides are happy to trade, they must be overconfident in their ability to accurately assess their bets and therefore willing to trade. Essentially, the odds on the outcome of a race are a rough reflection of the probability of the race occurring. People’s internal thoughts about the likelihood of the outcome are publicly expressed in money odds.
Odds values represent an implicit process of bargaining and compromise. Both the player and the bookmaker have a general intuition of what the appropriate odds are. Overconfidence leads both players to believe they have some kind of positive expectation (at the expense of the other side), which is of course logically impossible.
If there were no overconfidence, betting would not exist. Because both sides are rational and self-interested. The motivation is to profit from information that is better than the opponent’s, not to lose money as a result.
Watching from the Sidelines
While irrationality, overconfidence and other behavioral biases may explain betting. But that doesn’t necessarily mean that they control the way we bet. By understanding the significance of these behavioral biases and how all people are affected by them in one way or another. Bettors can ” watch from the sidelines”.
Understanding how behavioral bias affects betting decisions and learning to calculate betting profits does not take away from the fun of betting. It only puts you on the right path to calculating expectations and adopting smarter betting practices.