The brain and betting: The sunk cost fallacy makes you chase losses and waste more time and money on doomed ideas.
As mentioned in the previous “The brain and betting” blog post, the human mind is far from perfect. Basic human instinct, how we are initially programmed, can impact our ability to make rational judgments. This can prove costly when sports betting or making financial decisions.
One such mental mistake is called the sunk cost fallacy. Humans hate wasting time, money and other resources. We suffer from loss aversion, a tendency to prefer avoiding losses rather than acquiring gains.
Loss aversion was, according to Wikipedia, first identified by psychologists Amos Tversky and Daniel Kahneman. They suggest that most people lose more satisfaction from losing $100 than they gain satisfaction from winning $100. This is a mindset that many gamblers will recognise, and a central component of the sunk cost fallacy.
Sunk cost fallacy makes you fail more than you should
Most people will think they make rational decisions based on the future value of something, whether it’s an investment, a sports bet or something else. The truth is that sunk cost fallacy is one of several cognitive biases that cloud our judgement. Sunk cost fallacy makes us chase losses and invest more into failed projects.
For example, you have bought tickets (let’s assume they are non-refundable) for a football match on Sunday. Then your friend gives you free tickets for a tennis match, also on Sunday and at the same time. Most people would choose the football match, even though they might enjoy tennis more. The cost in buying the football tickets means that there is more pain involved in missing that game.
Or, you have created your own NBA basketball betting strategy and it has worked for years as a steady money-maker and the core of your sports betting investments. It’s your pride and joy. One season it stops working, causing you a sizeable loss. Which is repeated the following year. It’s clear that the game has changed, or the bookmakers have caught on. But your mind might trick you into trying it for at least one more year, because it hurts so much to acknowledge the losses of both your cash and your emotional investment into this betting love child.
Another example: We win ten bets in a row and feel like the kings of sports betting. Then the loss comes, and another. Sunk cost fallacy might be one of the mental mistakes contributing to stupid decisions in this scenario, such as taking more bets than usual with less research, increasing the stake per bet (even doubling, tripling or quadrupling it) and ultimately losing everything. Most sports bettors (and other gamblers) go through this experience at least once. Some learn from it while others can’t overcome the sunk cost fallacy and keep repeating their mistakes. These are the kind of mental challenges that can turn sharp gamblers (capable of winning long-term) into losers.
Some will remember Nick Leeson, the former financial trader who made huge profits (more than £10 million) from unauthorised speculative trades for Barings Bank (founded in 1762) in the United Kingdom. However, his luck changed and unable to cope with the losses or the reality of the situation he hid his losses and kept going until Barings Bank had lost £827 million, leading to its collapse in 1995.
In business and in economics, a sunk cost is a cost that has already been taken and cannot be recovered. Ideally a sunk cost should not be considered when making future business decisions as the cost remains the same regardless of the outcome of those decisions.
Despite this, the sunk cost fallacy makes us keep spending resources on projects that have already cost us something. Life is not easy; most people will struggle to forget a lost love, a lost investment or a lost opportunity.
Sports betting and sunk cost fallacy
There are some examples above on how sunk cost fallacy can affect your betting. Sports bettors need to be aware when they start thinking like this:
- I just had bad luck and I’m going to increase my stakes to win this back
- I have lost a few bets in a row, but now it has to be my turn to win
- I am going to double my stakes every time I lose to win my money back
- I hate losing more than I love winning (ideally, successful sports betting investors are detached from their bets whether they win or lose, instead focusing on long-term gains)
- I just have bad luck these days (note that this could actually be true. In this article from Pinnacle Sports you can learn how to test how much of your success or failure is down to randomness)
Lessons learned
We need to accept losses of money, time and emotional investments and walk away when it’s time to walk away. Failure happens. You can turn failure and lost resources into an advantage by learning from your mistakes, not repeating them.
Never chase your losses. If you feel a “tilt” coming on,whether it’s at the poker table, the betting screen or in your love life, cool off somewhere. It’s easier said than done
Sunk cost fallacy reversed: Let’s pretend the loss never happened
Some research has noted occasions where the sunk cost fallacy is reversed, meaning that some individuals appear irrationally keen to delete and forget a loss in order to move on with a new project. In sports betting, some people will probably relate to this; the feeling of deleting your previous, unprofitable betting records and forgetting them quickly in order to start fresh with a clean sheet, stricter betting rules and a new strategy.
A final thought
Just being aware that sunk cost fallacy exists can help in minimising its effects. It can even give gamblers and bookmakers an advantage.
Sunk cost fallacy and other cognitive biases also illustrate how important odds modelling and prediction systems are. A computer is not affected by cognitive biases and can treat statistics and information in a way that removes any bias when betting. Rule-based strategies, machine learning and artificial intelligence can provide an edge when betting, eliminating any shortcomings in the human mind.