Loss aversion

[Laman]

i voted for $125 - $149. if it was lower bet or if we would play longer at the same stakes, i would go for anything above $100 as says math and my gamesmanship, but i am a poor student and if i am to risk $100, i want it to be for something more profitable

[daniel_the_smith]

Alright, so 26 players above 10k responded so far, and by my count 18 are either really bad at visualizing their reactions or have way less than normal loss aversion. The other 8 are much closer to the number which is supposed to be average. It's not a big sample size but the effect size seems enormous, much larger than I expected. Unfortunately I think I picked too low of a strength cut-off, so it will remain untested as to whether loss aversion correlates with strength. But this does seem like evidence in favor of my hypothesis that go players have reduced loss aversion. But are you guys a representative sample of go players at large? Who knows, probably not! So it's not great evidence.

tapir: That is a totally valid point, and certainly one that I would go by in real life. For this exercise, though, assume that no fraud will be involved. Like you're playing the stock market or something. There's no fraud there ever.

quantumf: I used (my memory of) the wording in the book, even though I personally prefer yours. Your points, tapir's, and more are mentioned in the book.

Anyway, thanks everyone for participating. I do highly recommend the book ("Thinking, Fast and Slow" by Daniel Kahneman).

[jts]

Mathematics misses the point. "We" never flips coins. Usually the person who offers the bet will. When he is willing to offer an obviously bad bet from his perspective, it likely is a fraud. That is what I would expect and I would act on this premise, although it could be a psychologist (studying reactions to surprising offers) or a go player (trying to convince me that I have loss aversion) instead. In fact the more obviously the bet is bad for the person offering it the more convinced I would be of that.

And there are other considerations, too. What will your spouse say to you when you get home if you lose (will you tell her)? Will you have to walk to an ATM to get the cash if you lose (how far is it, what's the fee)? Can you really expect to collect from the person who offered the bet (how much time, effort, and burnt social capital is involved)? And on and on.

This makes it quite difficult to interpret the results of survey-based research into psychological questions like this. You can tell people to abstract from those concerns before they answer, but they rarely do, and if you follow up and ask them to explain their choice they will often give answers that they were specifically asked not to consider by the researcher. You can do experiments with real rewards, but these usually involve trifling sums of money or irrelevant tchotchkes (like mugs and pencils). There have been experimenters who took their research budgets to the third world, where they could offer people bets that were a substantial part of their annual income, but for ethical reasons they were never able to do loss aversion experiments like this...

[judicata]

I typed this yesterday, but it didn't submit : I would take a poll and look for arbitrage opportunities .

But assuming that losing wouldn't cause me to starve, and that transaction costs are negligible, I take the flip starting a few cents above $100, because there is a positive expected value. If it was my last $100, and I would starve without it, I wouldn't take the flip.

On the other hand, if I owed someone $200, and anything less would get me killed, AND this was my last opportunity to make the $200, I would take the flip for a penny.

People always fight these hypotheticals.

[Bill Spight]

One problem with these things is that psychologists (apparently) are not professional gamblers. If they were, they would know that the size of your bankroll matters. Moi, I would not make $100 bets without a bankroll of at least $10,000. I do not not have such a bankroll nor would I, for the sake of argument, contemplate shifting that much of my net worth to a dedicated bank account to serve as a bankroll. I think that a lot of people are in the same boat. Why bet at all?

OTOH, if I enjoy gambling, and set aside a certain amount of money for that hobby, an entirely different set of considerations apply.

[Bill Spight]

But this does seem like evidence in favor of my hypothesis that go players have reduced loss aversion. But are you guys a representative sample of go players at large? Who knows, probably not! So it's not great evidence.

What this shows, perhaps, is that readers of this forum are in better financial shape than college sophomores (the traditional guinea pigs for psychological experiments).

[hyperpape]

I have a certain threshold for my bank account ($n) below which I get nervous. Above that, I'd take the bet for any nontrivial odds.

I don't know whether you'd call that ignoring bankroll, or just that my bankroll for a single bet is $n + 100.

That's from having just enough exposure to economics that I think of myself as having a single lifetime income, and the ability to shift my consumption forwards or backwards in time (by spending or saving today). If I have more than $n, neither winning nor losing $100 should noticeably change my consumption patterns because it has a very small impact on my lifetime income.

I should note that when I told my wife that this is how I think of things, she looked at me as if I was a Martian. And truth be told, I don't act completely rational according to that picture, but it does have a pretty big effect on my thinking.

[Kirby]

One problem with these things is that psychologists (apparently) are not professional gamblers. If they were, they would know that the size of your bankroll matters. Moi, I would not make $100 bets without a bankroll of at least $10,000. I do not not have such a bankroll nor would I, for the sake of argument, contemplate shifting that much of my net worth to a dedicated bank account to serve as a bankroll. I think that a lot of people are in the same boat. Why bet at all?

OTOH, if I enjoy gambling, and set aside a certain amount of money for that hobby, an entirely different set of considerations apply.

Exactly! This is why the poll needs to take into account one's financial situation.

[Bill Spight]

That's from having just enough exposure to economics that I think of myself as having a single lifetime income

Aristotle would disagree. Smart guy.

[hyperpape]

Oh?

[Bill Spight]

Oh?

Well, Aristotle thought that all statements about future events were false. He also talked about potential infinity and did not believe in absolute infinity.

That is a bit extreme, and nowadays we tend to think about the future in terms of probabilities. But the study of probability is modern, and not completely understood, even by experts. One thing that trips them up is absolute infinity. It is by no means clear that you can talk about probability outside of well defined situations, which lifetime earnings certainly is not. In his Treatise on Probability, J. M. Keynes, also a smart guy and a modern economist, besides, proposes that not all probabilities are numerical, and are only partially ordered. He goes on at some length to explain why the practices of bookies, underwriters, and businessmen does not mean that all probabilities are numerical. Recent talk about Black Swans and unknowables is not just about "fat tails" of probability distributions. It is in the vein of Aristotle and Keynes.

[Bazoo]

Betfair, the exchange site, used to be a place to get positive odds on the coin toss in cricket Tests occasionally. I haven't seen it recently though.

[Kirby]

That is a bit extreme, and nowadays we tend to think about the future in terms of probabilities. But the study of probability is modern, and not completely understood, even by experts. One thing that trips them up is absolute infinity. It is by no means clear that you can talk about...

This reminds me of debates between those with a "bayesian view" of probability and those with a "frequentist view". As I understand it, frequentists view probability as a measurement of an event that has happened. For example, if you flipped a coin 100 time, you can count the number of flips to come to a probability for that coin. It is purely observational.

The bayesian view of probability, in contrast, allows for probability to be measurement of uncertainty about future events. In the case of flipping a coin, you may have a prior belief/assumption that the coin will come up heads 50% of the time.

Using this practically ina learning algorithm, for example, you have your prior probability that really is like your hypothesis from the scientific method. Then you perform an experiment. Observe. Then update your prior and repeat.

From a frequentist's view, we do not set an initial prior probability because we go only on prior observation.

In the long run, the two methods converge.

However, am partial to the bayesian view because using experience from other endeavors can sometimes allow one to make guesses about the future more accurately.

But it's just a hypothesis, so the essential thing to remember is to update your belief if observation deems it necessary!

[jts]

Oh?

Well, Aristotle thought that all statements about future events were false.

Oh, ya? Well that's funny, because happen to have Aristotle right here...

It is therefore plain that it is not necessary that of an affirmation and a denial, one should be true and the other false.

All necessary statements about future events are false. (That includes statements about necessary falsity, of course. I'm such a geek.)

In his Treatise on Probability, J. M. Keynes, also a smart guy and a modern economist, besides, proposes that not all probabilities are numerical, and are only partially ordered. He goes on at some length to explain why the practices of bookies, underwriters, and businessmen does not mean that all probabilities are numerical. Recent talk about Black Swans and unknowables is not just about "fat tails" of probability distributions. It is in the vein of Aristotle and Keynes.

But I don't think Keynes was against the lifetime income hypothesis. Was he? I mean, it's a little bit anachronistic to talk about Keynes position on this since the issue was only really fleshed out after he died, but I believe a lot of things he says about savings and investment only make sense if you believe that people spend as though they had a whole lifetime's worth of income to draw on on any given day.

[aokun]

By "less than $110" do you mean "and more than $100" or "exactly $110."?