Why we risk more when we lose
When Haas School of Business professor Eduardo Andrade and his wife-to-be were planning their first trip to Las Vegas, she insisted they hold themselves to a budget. So Andrade was surprised when the usually pragmatic woman, having quickly lost her allotment, abandoned her plan and continued gambling. Intrigued, he decided to find out what had changed her mind.
Teaming up with colleague Ganesh Iyer, Andrade set up a series of experiments. In the first, participants planned two bets in a roulette simulation. After the outcome of the first bet, they could either stick to their plan or change it. The researchers found no noticeable pattern among those who won the first bet, but, says Andrade, “about 40 percent of those who lost deviated [from their plan], and within that 40 percent, 90 percent bet more than planned. And that was a huge effect.”
Andrade, who studies how emotions affect judgment, thought the observed behavior might be explained by something decision theorists call the “hot–cold empathy gap”—that is, our inability to anticipate how miserable we’ll feel when the worst happens. Indeed, when asked to predict how they would react emotionally to a loss, 70 percent of Andrade and Iyer’s subjects underestimated how bad they would feel. “That’s you!” Andrade recalls telling his now-wife. “She bet, and she lost, and she got really pissed off, and she was actually surprised by how bothered she was by this. She said, ‘You know what, there’s only one way of getting around this, and that is to bet a little more.'”
So if emotions were playing a role, Andrade wondered whether they could be manipulated in a way that would affect behavior. To test this, he and Iyer rigged the game so that everyone lost the first bet. Then experimenters feigned technical difficulties. While subjects waited for betting to resume, they were shown a short video clip—a neutral documentary, a drama, or the sitcom Friends. When it came time to make the second bet, the people who’d watched Friends behaved as if they’d won, while those who’d viewed the drama or documentary exhibited no discernible change.
Is there a lesson in all this? For his part, when Andrade gambles, he doesn’t bother with a budget. He knows better than to think he’ll stick to it. As for his wife, well, she doesn’t gamble anymore.