Fear and loathing in Las Vegas: Evidence from blackjack tables
Abstract (Via JDM)
This paper uses proprietary data from a blackjack table in Las Vegas to analyze how the expectation of regret affects peoples’ decisions during gambles. Even among a group of people who choose to participate in a risk-taking activity, we find strong evidence of an economically significant omission bias: 80% of the mistakes at the table are caused by playing too conservatively, resulting in substantial monetary losses. This behavior is equally prevalent among largestakes gamblers and does not change in the face of more complicated strategic decisions.
Introduction (Via JDM)
Much of modern economics is built on the premise that people maximize their expected utility for wealth when making decisions under uncertainty. In contrast, psychologists argue that people often act not so much to maximize their expected utility, but instead to minimize their expected regret — that is, people make choices to minimize their expected feeling of remorse when an action turns out badly compared to other alternatives (e.g., Kahneman and Tversky, 1982). In some decision environments, this can lead people to suboptimally favor inaction over action, inducing what is known as the omission bias (e.g., Ritov and Baron, 1990; Spranca et al., 1991).
Excerpt (Via JDM)
Inaction plays a salient role in a wide range of decisions. For example, people are reticent to vaccinate children with a potentially lethal vaccine, even when this risk pales in comparison to the incidence of death caused by the primary disease (Ritov & Baron, 1990; Asch et al., 1994). A staggering number of US households fail to rebalance their stock portfolios when it is optimal to do so (Campbell, 2006; Campbell, Calvet, & Sodini, 2009). Many US workers under-participate in their retirement plans, despite the presence of employer-matching programs (Benartzi & Thaler, 2004). Shoppers are often reluctant to make purchases when discounts are randomly offered in the market (Simonson, 1992).