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:
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.
 
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.
More details: "Rational Decision-Making under Uncertainty: Observed Betting Patterns on a Biased Coin".