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LOSS AVERSION AND STAKING PLANS

Here's the "duck's guts" of an interesting article I came across on the New Yorker web site.

It simply says: If you present people with an even chance of winning a hundred and fifty dollars or losing a hundred dollars, most refuse the gamble, even though it is to their advantage to accept it.

if you multiply the odds of winning—fifty per cent—times a hundred and fifty dollars, minus the odds of losing—also fifty per cent—times a hundred dollars, you end up with a gain of twenty-five dollars.

If you accepted this bet ten times in a row (assuming the chance remains the same), you could expect to gain two hundred and fifty dollars.

But, when people are presented with it once, a prospective return of a hundred and fifty dollars isn’t enough to compensate them for a possible loss of a hundred dollars. In fact, most people won’t accept the gamble unless the winning stake is raised to two hundred dollars - in other words their mental calculator tells them that even though the odds are even money, they want 2/1 as some sort of compensation for playing.

The article also noted that this loss aversion is due to the fact that under ambiguous situations (or situations that involve probabilistic estimates in face of incomplete information to make the probabilistic judgments), our 'emotional' brain takes precedence over the 'rational' brain and prevents us from making 'rational' decisions.

Some folk though simply don't see the opportunities even though it is right there in front of their eyes. In a lot of cases it is simply because they don't take the time to look at the information presented.

Two of the most important factors to me are class and distance. Is the horse running in its correct class? Has it performed well in this class before. Does it consistently get flogged in this class even though it can win in a weaker class? Is the horse stepping up too much in prize money race for today's race - by that I mean, has it been running in $15000 races and today's is $40000?

If you look at the form guide - one assumes you at least do that - do you look to see how the horse has performed at today's distance? Is it's winning from, say 1400 to 1600 metres, and today's race is 1100 and do you note that it has started 5 times in races less than 1200 metres and been unplaced on all occasions?

These are the exact same "signs" that people don't see when they are presented with a positive gambling opportunity in which you have a fair and balanced chance of success.

In another of these endless studies - but this one is worth thinking about - a group of volunteers placed bets on whether the next card drawn from a deck would be red or black.

In an initial set of trials, the players were told how many red cards and black cards were in the deck, so that they could calculate the probability of the next card’s being a certain color. (And undoubtedly adjusted their "bets" accordingly. It's why they go out of their way to foil card counters in casinos)

Then a second set of trials was held, in which the participants were told only the total number of cards in the deck.

Now the first trials correspond to the theoretical ideal: investors facing a set of known risks so they participated more freely.

The second setup was more like the real world: the players knew something about what might happen, but not very much. As the researchers expected, the players’ brains reacted to the two scenarios differently. With less information to go on, the players experienced more "fear controls" in trial number 2 and played less. Hardly a shock to the system!

The results of the experiment suggested that when people are confronted with increased ambiguity, their emotions overpower their reasoning, leading them to reject risky propositions. (Sometimes not a bad move by the way)

HOWEVER, it raises the intriguing possibility that people who are less fearful than others might make better investors. So - today's question: what would you do if you weren't afraid?

And does having a non-optional staking plan decrease the fear factor and keep those negative emotions in check? Just asking.

Horse racing systems and research