The paper invited 61 people, a combination of college-age students in finance and economics and some young professionals at finance firms (including 14 who worked for fund managers), to take a test. They were each given a stake of $25 and then asked to bet on a coin that would land heads 60% of the time. The prizes were real, although capped at $250.More details: "Rational Decision-Making under Uncertainty: Observed Betting Patterns on a Biased Coin".
Remarkably, 28% of the participants went bust, and the average payout was just $91. Only 21% of the participants reached the maximum. 18 of the 61 participants bet everything on one toss, while two-thirds gambled on tails at some stage in the experiment. Neither approach is in the least bit optimal.
Friday, November 04, 2016
Bad Betting Strategies
Even smart people do badly when they get to bet on a coin toss, where they know in advance it's biased to land 60% heads: