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....