How do people make risky decisions when they have to rely on their own experience? Photo credit to Saul Vera via Creative Commons.
When it comes to taking a gamble for a big win, experience trumps the odds.
A University of Alberta study showed that people who learn the odds through experience—the act of gambling—are more likely to risk big for a large payout. But when told the odds, people are more likely to settle for a sure thing.
“The main thing we’re looking at here is how people make risky decisions,” explained lead author and psychologist Christopher Madan.
In the study, 256 undergraduate students were given the odds for risky and non-risky choices. In one scenario, they could take a guaranteed payday of 20 points versus a 50-50 shot at doubling their winnings or getting nothing. Alternatively, they could choose a guaranteed loss of 20 points versus a 50-50 chance of losing nothing or losing 40 points.
“What typically happens is people are risk averse for gains—they’ll take the guaranteed win,” said Madan, who led the study while earning his PhD in psychology. “But for losses, they’ll be relatively risk-seeking. They’ll run the chance that, ‘Maybe I won’t lose anything.’”
But in real life, most people don’t know the odds. So what Madan also wanted to find out—and what’s less understood by scientists—is how people make risky decisions when they have to rely on their own experience.
In that part of the experiment, the same group of participants were told to click one of two different-coloured doors—with no information about the outcome until after their choice.
“You don’t know what the odds are and you learn the outcomes through experience, just by having them happen,” said Madan, now a postdoctoral fellow at Boston College.
It turns out, experience completely shifted people’s choices. The extremes of gaining big or losing big stood out most often in their minds—a distortion in how experiences are remembered—leading participants to choose the safer bet.
Where gamblers get into trouble
With casino slot machines, you don’t know the odds of winning. It’s only through experience—either playing the slots or watching others—that you get a sense of what the probabilities are.
“But what do you do with that information? You might wait too long and think that winning happens more often, because of biases in the way your memory works,” Madan said.
And that’s partly where pathological gamblers could run into trouble, by experiencing an even stronger memory bias, he added.
“You think winning happens more than is actually the case. If that’s what you actually think is true—even at an unconscious level—then with that bias in mind it would make sense to gamble. You think winning happens when really it’s a memory distortion.”
The study was published in September in the Quarterly Journal of Experimental Psychology.