Why Do Humans Take Risks?
Part 2
Hey guys, Culture here.
Today we're going to finish off our discussion on risk-taking; more specifically, we're
going to explore whether our decisions are rational and the tricky tactics employed by
casinos.
And that reminds me, I'm going to finish recounting my love escapade.
Unfortunately.
We left off last time talking about Step 4 in the decision-making process: Weighing the
evidence.
When picking between alternatives, the rational option is the one which gives us the best
value; that is, the most benefit with the least cost.
Nicolas Bernoulli, a Swiss mathematician, challenged this notion in 1713 by creating
the St. Petersburg Paradox.
The St. Petersburg Paradox involves a gambling game in which a coin is flipped multiple times
in a row.
A starting amount of $2 dollars doubles every time a head turns up and the game ends whenever
tails comes up.
The player then collects whatever is in the pot.
The question is: What would be a fair price for the player to pay to enter the game?
What we really need to know is the expected value: that is, how much would the player
usually receive per game?
A bit of high school maths tells us that the expected value is the sum of the values multiplied
by their probabilities.
For example, there is a 1 in 2 chance that the first toss is tails, which would end the
game and the player would receive $2 dollars.
There is a 1 in 4 chance that the first toss is heads and the second toss is tails, which
would pay out $4 dollars and so on.
The issue here is that if we continue along this way we find a trend: The halving probabilities
and doubling rewards give values of 1 that sum up to infinity.
Put simply, the expected payout for this game is an infinite amount of money so players
should be willing to pay any amount to take part purely mathematically.
But Philosopher Ian Hacking had it right when he said "few of us would pay even $25 dollars
to enter such a game," so this conclusion sounds stupid right?
Did someone say stupid?
I'm back bitches.
When we last left off I was at a low point, dejected on the pavement outside of the casino
and with my newfound love Rouge nowhere to be found.
I was determined to get back inside, and so I called up the only friend I had in Las Vegas:
Jimmy the Blurter.
Dumb name.
Continue.
F: Jimmy had a penchant for mischief-making and I knew if anyone could help me get past
the guards it was him.
We spent a day at his place meticulously crafting our plan and by the night, we were ready to
put it into action.
In 1738 Daniel Bernoulli, Nicolas Bernoulli's cousin and also a mathematician, provided
his solution to this paradox by creating the expected utility hypothesis.
Without getting bogged down in the actual maths, Bernoulli essentially added a "utility"
function to the equation for expected value to represent how an individual's risk aversion
affects their decision in each case.
Imagine you are offered a choice: You can pay $5 dollars for a 1 in 2 shot at winning
$50 dollars.
Which would you take the chance?
The $50 is pretty tempting, right?
I'd say most people would take the chance.
Now here's another choice: You can pay $5 dollars for a 1 in a billion shot at 25 billion
dollars.
Which one would you choose?
Your answer should, according to the expected value of $25, still be to take the risk since
the expected value is the same.
But this simply isn't true for most people.
For one thing, some people are more risk averse than others and the small probability of winning
would scare them off.
Secondly, someone who is incredibly poor values $5 dollars more highly than someone rich…
you get the picture.
Daniel Bernoulli's utility function added in a factor dependent upon the probability
of winning such that the smaller the probability of winning, the less "utility" the alternate
option has.
Therefore, a rational decision is one in which the selector chooses the alternative with
the highest utility, not the highest value.
Jimmy and I stood around the corner from the casino, the sounds inside were but a faint
din and the smell of vomit emanated from behind a nearby dumpster.
The bouncers stood like sentinels at a fortress, eagle-eyed and wary.
Jimmy and I turned to one another and nodded our heads: It was go-time.
Jimmy strolled out from behind the corner nonchalantly and approached the door to the
casino.
He was mere inches from the bouncers when, quick as a flash, he ripped off his tear-away
shirt and pants and sprinted into the casino.
Did I forget to mention Jimmy is a streaker?
Well yeah, he is.
You're an idiot.
Rational decisions, unlike those that Jimmy makes, follow many axioms of logic.
We might cover logic in another video, but suffice to say for now that people don't
always make the logical decision, instead letting their emotions take control.
Daniel Kahneman and Amos Tversky, cognitive psychologists, performed a study in 1981 proving
one such irrationality that many people utilise in decision-making.
In fact, you guys already know the kind of question that Kahneman and Tversky asked respondents
since I gave it to you at the end of the last episode!
I'll restate it again in short to remind you: There's a disease that is expected
to kill 12000 people, and two vaccines.
The first vaccine will save 3000 people.
The second vaccine has a 1 in 4 chance of saving all 12000 people and a 3 in 4 chance
that no one will be saved.
Which vaccine would you choose?
Hopefully you still have your answer in mind, now let me ask you this: Once again there's
a disease that is expected to kill 12000 people, but this time there are two programs to counter
the disease.
The first program will kill 9000 people.
The second program has a 1 in 4 chance that nobody will die and a 3 in 4 chance that 12000
people will die.
Which program would you choose?
Have a second to think.
Kahneman and Tversky asked similar questions to those I just posed and found that in the
first scenario 72% of respondents preferred the vaccine that saves 3000 people.
In the second scenario, only 22% of respondents preferred the program that kills 9000 people.
But some of you might have already caught on to the trick of this scenario: Based on
expected value and utility, the two scenarios are exactly the same.
All that's changed is that the questions were phrased differently: The vaccines referred
to how many people lived whereas the programs referred to how many people died.
Vaccine 1 and Program 1 had the same outcome however: Both of them saved 3000 people and
killed 9000.
Additionally, Vaccine 2 had the expected value of people saved as Vaccine 1 and the same
is true for Program 2 and Program 1.
Yet still we exhibit some bias because we're distracted by the wording of the question,
a subtle difference.
But the not-so-subtle streaking Jimmy acted as my distraction.
As he raced into the casino the bouncers chased after him, the fatter one huffing and puffing
whilst the slimmer one tripped over chairs and pushed past people.
Very rude.
I could see the look of pure happiness on Jimmy's face and I knew it was now my turn
to find that same happiness.
I stepped into the casino, my heart pounding, and returned to where I had first met Rouge.
But as she entered my view, my heart stopped.
She was there, beautiful as ever, but there was a man with her.
He had his hands all over her and worst of all she lit up at his touch.
That joy that I thought was just for me, she now gave away to this stranger.
I'm…
I'm sorry Culture, please go on.
Yeesh… ah, ahem, right, where was I?
Oh yeah, decision making.
There are some explanations offered up for why we sometimes make irrational decisions.
First of all, there's the comparison of humans to dual processors; that is, we are
capable of making controlled, analytical responses but often use automatic, intuitive processes
for speed since we can't always afford to be as accurate as possible.
"My CPU is a neural net processor, a learning computer"
Another explanation is the "security potential/aspiration" theory which posits that people simplify complex
gambles to the best and worst possible outcomes.
It's a form of dilemmification whereby we create only two alternatives to make choices
easier.
One could also say-
Ah Rouge, I realised then that I was just another tale for you to add to your collection.
Yet despite the cold nature with which you dismissed me, I cared for you.
I still care for you.
I hope these other travellers treat you as well as I did.
Except for that time I spilt my beer on you and the casino staff had to check to make
sure your circuitry wasn't damaged.
Oh the times we had together-
Wait, hold up… "circuitry"?
Pardon?
What do you mean "circuitry"?
The electrical wires which power her display and reels.
Crash, what the… no… okay this is too far, even for you.
Tell me: What is Rouge's last name?
No silly, Rouge is her last name, a nickname if you will.
Her full name is Moola Rouge.
… like a parody of Moulin Rouge?
Like the slot machine, Crash?
Wow, now I get it… you're prejudiced.
I really didn't expect this judgement from you Culture.
And by the way, the politically correct term is "Electronic Gaming Machine" you slot-ist
pig.
No wonder you were so addicted!
EGMs are designed to keep you playing and take you for all you're worth.
The American Gaming Association found that approximately 70% of casino revenue comes
from EGMs alone.
People sit on them all day because they lose track of time in the windowless, clockless,
cavernous expanse of the casino.
NO, YOU'RE WRONG!
ROUGE WAS SPECIAL!
Afraid not Crash, just like every EGM she was specially designed to hook you in and
take your money.
At least in the old days slot machines had actual physical reels and levers.
Each machine would have 3 reels and 22 spaces on each reel.
Of the 22 spaces, 11 would be blank and 11 would be icons with only 1 being a jackpot
symbol.
That made the chance of getting a jackpot 1 in 10648.
Not only were these odds better than modern EGM's, but more importantly they were known
and calculable.
But in 1982 a new technology came onto the market called Virtual Reel Mapping.
This allowed for EGMs to be created which have entirely virtual reels with 516 spaces
each, decreasing the chance of a jackpot to 1 in 137 million; an almost 13000-fold lower
probability than old slot machines.
So Rouge wasn't just one in a million… she was one in 137 million!
I knew she was special.
Not even, Rouge was a liar- I mean, the EGM you played on was a liar.
EGM technology has advanced even further now, with deceptive little tricks to hook players
in.
Imagine the feeling of playing an EGM and being just one symbol off of a jackpot.
You were so close, right?
Well maybe not, after all casinos can actually increase the chance of these so-called "near-misses"
to give players a feeling of temporary satisfaction.
Even back in 1953 psychologist Burrhus Skinner (the same guy behind the Skinner Box experiment)
showed that these near-misses increased player time spent on the machine.
In gambling addicts, a near-miss has even been shown to make the brain respond in the
exact same way it would as if they had won.
They're feeling rewarded for losing, Crash!
It was just a privilege to even be so close to her though…
Another dirty tactic is "starving wheels" in which the number of jackpot icons on one
virtual reel is less than another.
This once again creates that "so close" feeling of near misses, since two of the reels
show up matching jackpot icons more often.
The same trick is used on scratchies where an "almost win" condition is usually put
on the card to raise your hopes.
It's for sketchy reasons like these that Virtual Reel Mapping is banned in Australia
and the UK.
The only thing I'm starved of is Rouge's attention…
But even without Virtual Reel Mapping these EGMs trick you!
Old slot machines used to just have one pay-line, but new EGMs have multiple pay-lines.
Picture the slots from the Game Corner in Pokémon.
Let's say that you bet $1 dollar for each pay-line up to a total of $5 dollars for 5
pay-lines.
Then you match up icons such that you get a small amount of money, say $3 dollars.
Because you got money, the machine lights up and makes sounds all of which are congratulatory…
even though you actually just lost $2 overall.
But despite your conscious awareness of this, your brain still interprets these visual and
auditory signals as a win and so you keep playing to feed off of the high.
Gamblers have been known to sit at a machine for 12 hours or more on end, slowly losing
money in this fashion.
They call it "the zone", a kind of enduring high that makes the gambler forget about their
worries.
Gamblers have even forgotten basic bodily requirements, wetting themselves right there
in front of the machine… just like some MMORPG players I know.
Oh come one, that was one time!
And besides, it was different with Rouge.
She took all my cares away.
Yeah, and all your money too, I'm guessing.
Any casino game you can think of always favours the house in the long run.
Casinos aim to maximise the amount of time you spend playing their games and minimise
the amount of time per gamble to increase their profits.
I'm sorry buddy but to them you're just another sucker, and Rouge is a part of that.
Don't let this Martingale Mistress convince you you're an MVG.
You're… you're right.
I need to let her go.
Thanks Culture.
No problem Crash, I'm just happy that… wait, what am I talking about?!
You made that whole story up!
You even said you went to Vegas in 1998!
I may have exaggerated that part for dramatic effect but my love affair with Rouge was all
true, I swear.
But you said you brought her up to your room and uh… y'know… "made love to her."
None of that makes sense now that I know she's a slot machine!
Oh I did though Culture.
I entered my tokens, I pushed all the right buttons and then…
BOOM!
Jackpot.
And on that image, see you next week everybody!
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