Gamblers who back a winning horse are likely to reduce their risk-taking in the afterglow of success, a study of race bettors in Finland has found.
Psychologically, loss is known to cause about twice as much pain as the pleasure caused by similar gain. However, earlier studies that have examined how prior outcomes affect subsequent risk-taking have reported results that appear contradictory.
A new study carried out among horse race bettors by the University of Eastern Finland Business School shows that loss reduces subsequent risk-taking, and bettors also tend to avoid loss when betting money they have already won.
The researchers, who reported their findings in the journal Management Science, observed the betting behaviour of more than 5000 Finnish horse race bettors at a race meeting.
Data for the study came from the online betting database of Fintoto, a betting company with a legal monopoly for horse-race betting in Finland.
The anonymous individual-level data on bettors and their betting choices made it possible for the researchers to analyse the role of earlier gains and losses on subsequent betting behaviour.
“At first, we were surprised to find out that earlier losses reduced risk taking, because many earlier studies focusing on the financial and housing markets have shown that people tend to take greater risks after experiencing a loss,” said Niko Suhonen, one of the study’s authors.
“Researchers have suggested that one of the main explaining factors is that people are haunted by their loss and are ready to take greater risks to break even. In gambling, however, bettors become more cautious after losses.”
The researchers also found that while horse race bettors also reduced risk-taking after losses, their goal was to break even at the very least − that is, to avoid loss at the end of the day.
The study’s other author, senior lecturer Jani Saastamoinen, said: “Generally speaking, the tendency to chase losses is associated with increased risk taking. Our findings, however, are different, providing additional insight into the mechanisms that affect risky decision-making.”
Suhonen added: “Compared to conventional stock investments, one of the key differences is that horse race bettors can reduce their bets while choosing odds of their preference, making it possible to reach a break-even point in the event of a winning bet.”
The researchers observed a similar phenomenon in the event of gain: although bettors tended to increase their bets after gains, their subsequent bet (i.e. potential loss) did not exceed their earlier gains. In other words, bettors tended to bet their earlier gains while avoiding loss. This phenomenon is known as the “house money effect”, as bettors regard their recent gain as the “house’s money,” not their “own money”, which can be used more freely.
For decades, researchers studying risky decision-making have used the gambling market as a test laboratory for analysing people’s behaviour in genuine, yet controlled environments. Today’s online gambling and the related data constitute an important platform for testing different theories.
Suhonen and Saastamoinen believe their findings can also be applied to many other situations involving risky decision-making.
“For example, when a stock plunges, a stock investor can think about whether or not he or she would purchase the stock at that moment. If this hypothetical thought experiment ends in the conclusion that the investor would not purchase the stock, he or she might do wisely in selling the current one. This makes it possible to illustrate the psychological burden caused by earlier losses,” the pair said.
The study was funded by the Emil Aaltonen Foundation.
Suhonen Niko, Saastamoinen Jani. How Do Prior Gains and Losses Affect Subsequent Risk Taking? New Evidence from Individual-Level Horse Race Bets. Management Science, March 2017. http://dx.doi.org/10.1287/mnsc.2016.2679.
The abstract can be read here.