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Rational Decision-Making Under Uncertainty: Observed Betting Patterns on a Biased Coin

Author

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  • Victor Haghani
  • Richard Dewey
Abstract
What would you do if you were invited to play a game where you were given \$25 and allowed to place bets for 30 minutes on a coin that you were told was biased to come up heads 60% of the time? This is exactly what we did, gathering 61 young, quantitatively trained men and women to play this game. The results, in a nutshell, were that the majority of these 61 players did not place their bets very well, displaying a broad panoply of behaviorial and cognitive biases. About 30% of the subjects actually went bust, losing their full \$25 stake. We also discuss optimal betting strategies, valuation of the opportunity to play the game and its similarities to investing in the stock market. The main implication of our study is that people need to be better educated and trained in how to approach decision making under uncertainty. If these quantitatively trained players, playing the simplest game we can think of involving uncertainty and favourable odds, did not play well, what hope is there for the rest of us when it comes to playing the biggest and most important game of all: investing our savings? In the words of Ed Thorp, who gave us helpful feedback on our research: "This is a great experiment for many reasons. It ought to become part of the basic education of anyone interested in finance or gambling."

Suggested Citation

  • Victor Haghani & Richard Dewey, 2017. "Rational Decision-Making Under Uncertainty: Observed Betting Patterns on a Biased Coin," Papers 1701.01427, arXiv.org.
    • Handle: RePEc:arx:papers:1701.01427
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    References listed on IDEAS

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    1. Steven D Levitt, 2021. "Heads or Tails: The Impact of a Coin Toss on Major Life Decisions and Subsequent Happiness," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(1), pages 378-405.
    2. Powdthavee, Nattavudh & Riyanto, Yohanes E., 2012. "Why Do People Pay for Useless Advice? Implications of Gambler's and Hot-Hand Fallacies in False-Expert Setting," IZA Discussion Papers 6557, Institute of Labor Economics (IZA).
    3. James J. Choi & David Laibson & Brigitte C. Madrian, 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1405-1432, April.
    4. Powdthavee, Nattavudh & Riyanto, Yohanes E., 2012. "Why do people pay for useless advice?," LSE Research Online Documents on Economics 121779, London School of Economics and Political Science, LSE Library.
    5. Joshua B. Miller & Adam Sanjurjo, 2014. "A Cold Shower for the Hot Hand Fallacy," Working Papers 518, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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    Cited by:

    1. Skjold, Benjamin & Steinkamp, Simon Richard & Hulme, Oliver J & Peters, Ole & Connaughton, Colm, 2023. "Are risk preferences optimal?," OSF Preprints ew2sx, Center for Open Science.

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