Recently I traveled to Las Vegas for business.  I’ve been there about five or six times all for business related reasons and EVERY time I’m amazed at the place. For one…its in the desert. Two, the buildings that exists there are unimaginable; I was standing under the Effie Tower while being in a building. And third…the backbone of Vegas- gambling. I watched a guy lose over $100 at video poker ( in about 5 minutes), and he didn’t even spill his drink. Call me frugal, call me smart – or call me intone with my economic mind. Whatever the reason, I don’t understand why how people can risk their hard earned money on games which clearly have a bias.

Behavioral economics is a tricky subject. In a nutshell, it attempts to rationalize the irrational. Throughout time, humans have subscribed to the “economic man” theory- where humans make rational decisions weighted on cost/benefit. If you’ve been to Vegas however…you know this isn’t true. The guy taking another card on a 19, or someone betting it all on black, the odds are always against you. So how does Vegas survive? Behavioral economics explains that many decisions are made upon risk seeking or risk aversion. Placed in identical situations, even the same person may not choose the same result due to these behaviors. I recently read a study by Ayako Onzo  And Ken Mogi from the Tokyo Institute of Technology. They set up an experiment where subjects were given 5 “units”. The subjects could then push one of two buttons – bet or escape. The probability of winning was fixed at 25%, but time limits and phrases were used.

They found that when subjects were shown the “You Win” tag, they were more likely to bet, however less likely when about to lose their units and be out of the game.

This phenomenon can be traced to an experiment by Daniel Kahneman. Kahneman set up a experiment dealing with lotteries. the subjects had to choose between lottery Red and Black. In Red, there is a sure loss of $750. In Black, there is a 75% chance to lose $1000 and a 25% chance to lose nothing. They found that although both lotteries had an identical expected value, a clear majority of respondents preferred Black (13% of the subjects chose Red and 87% chose Black). This result suggests that there is a risk seeking preference on this kind of negative

choice. Relate this to ANY gambling. With the odds, it is more likely for you to lose your money, but who would play a game with flashing lights that says “Lose $50 Here!”

The second part of the Japanese study also shows how attitude can affect decision. Like in a slot machine, when a player wins, they are more likely to bet again, especially if that win “saved” their credits. Now im not saying the machines are rigged, but its pretty interesting that you win when you have one credit left, just enough to entice you to keep betting.

So believe it or not, Vegas certainly have their pulse on behavioral economics – they know how they want you to think, and they know how to get you to think that way. So the next time the dice is calling your name…just buy baby the new shoes.

Looks like is paper bags for baby....