The Pull of Risk Aversion Is Super-Strong

We've written about Prospect Theory here before. In general terms, it's a human element that involves putting a greater emphasis on not wanting to lose something, even when the decision making is not mathematically sound. It's the classic birds in the hand idiom, even though you can have more birds in your hand with a little bit of risk taking.

It's a powerful cognitive bias, and we see it in all walks of life - coaching decisions, betting decisions and elsewhere. In one of my favorite examples, professional golfers are more effective on putts of ten feet when saving par rather than making a birdie. Bogeying a hole is more painful, so apparently their subconscious grinds more.

I was reading about Jeopardy champ James Holzhauer today, and Prospect Theory rears its head in his run as well. Washington Post columnist Charles Lane is one of a number who believes Holzhauer is a "menace" because of the way he plays the game.

"I have nothing personal against James Holzhauer. What I am a little concerned by is the application of, kind of, database-probabilistic optimization to an innocent game show like Jeopardy."

Think about that for a second.

Charles Lane, a former Jeopardy contestant, is mad at James for playing the game right.

Holzhauer is not some sort of alchemist. He's betting optimally, choosing categories at a sequence that maximizes his chance to win, but he isn't doing it the way we would ...... he isn't doing it to minimize risk! That's the way everyone plays the game. They ease into categories, wager daily doubles with the thought of the pain of what happens when the question is missed, not gotten correct.

Even these smart Jeopardy folks use Prospect Theory, and it's so powerful that when someone doesn't use it, it sticks out like a sore thumb.

The warm and cuddly Inside the Pylons - when analyzing ticket structure on twitter - often displays anti-prospect theory: Why use the favorite if you don't like them, because it's mathematically unsound; and other assorted principles. His view is James' - the pain of missing a 4-5 chalk and losing a bet is too much for a lot of people, and if he wants to win, and bet right, that's irrelevant.

It's a lesson we all have trouble with in wagering. But if we want to increase our bankrolls, it's something we have to get a hold of, no matter how hard it is.

Have a nice Tuesday everyone.

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