Gambling can be a headache for believers in rational choice. Everyone is expected to make rational choices that maximize their profits while minimizing their losses.
This article explores the lack of understanding of expectations and why mathematical expectations and actual needs (or desires) don’t always mean the same thing.
Is gambling an irrational act?
For most types of betting, expectations are negative. Most bettors do not mathematically calculate the odds of the outcome and do not seem to expect that they will make a profit.
Once the cost of betting is taken into account, such as the edge of the house and the bookmaker’s profit. The average bettor loses money after betting for a period of time. Even if they manage to be profitable in the short term. On this basis, it is reasonable to say that gambling is an irrational act. There is also plenty of evidence that players do not understand the odds behind their decisions.
When it comes to estimating the probability of an event, decision makers overestimate the less likely events and underestimate the almost certain ones. And the most obvious in betting is the hot-cold bias. This means that the expectation of the cold option is worse than the hot option.
We have a variety of cognitive biases, and lack of ability to correctly estimate odds is just one of them. But in the world of betting, there is a potentially more serious bias that arguably occurs: overconfidence.
The illusion of overconfidence is a cognitive bias. Due to the competitive environment in the gaming industry. Forecasters compete with each other in their analysis and we can expect overconfidence to be a common phenomenon.
It is assumed that both parties are happy to trade, they must be overconfident in their ability to accurately assess their bets and therefore willing to trade. Essentially, the odds on the outcome of a match are a rough reflection of the probability of the match occurring.
The odds value represents an unspoken process of bargaining and compromising. Both the player and the bookmaker have a general intuition about what the appropriate odds are. Overconfidence leads both sides to believe they have some sort of positive expectation (at the expense of the other), which of course is not logically possible.
Without overconfidence, betting would not exist. This is because both sides are rational and self-interested. The motivation is to profit from better information than the opponent, not to lose money from it.
While irrationality, overconfidence and other behavioral biases can explain betting. But this does not always mean that they control the way we bet. Learn how behavioral biases affect betting decisions and learn to calculate betting profits. It will put you on the right road to calculating expectations and adopting more informed betting practices.