Every gambler makes mistakes but why do many keep making them?

Every casino gambler makes mistakes. Most know it and repeat them anyway. Primarily because they don't really grasp the underlying nature of their errors or why they commit them. An article on "behavioral finance" in The Wall Street Journal, aimed at investors, gives insights into this enigma. (The Mistakes We Make – and Why We Make Them, August 24, 2009)

The author, Meir Statman of Santa Clara (California) University, cites as one factor the confusion of the future with the past and hindsight with foresight. It may seem obvious now that the global economy was about to collapse in 2007, he stated. But it wasn't then. And, when a session at a machine or table is over, hindsight might indicate when solid citizens should have quit or pressed their bets to the limit. But there was no way to anticipate, at the time, what was about to happen.

Another mistake is being guided by either exuberance or fear. Professor Statman noted that investors gobbled up stocks in February 2000 when optimism was high – and did badly, and held back in March 2003 when pessimism was rampant – and could have done well. In the casino, the analogy is acting when a machine or table seems hot or cold, judgments that are pure illusions.

What Professor Statman dubs "confirmation errors" can also be dangerous. Stories about rare successes that neglect to mention widespread failures create a bias toward what worked in some situations. They lead individuals to establish beliefs – for instance, this will be my lucky day – then seek evidence that corroborates these notions and dismiss anything that refutes it. Overcoming the confirmation error, he asserts, involves recognizing random processes for what they are.

Despondency over losses is a problem as well. You know those banal gambling maxims about only bringing what you can afford to lose and betting with your head but not over it? Following them, you'll avoid the falsity Professor Statman describes as letting ego deflation under losing conditions get misconstrued with damage to aspects of your life that are truly important.

He also advocates the value of understanding that gains or losses generally have greater impact on happiness or misery than levels of fortune. One person's casino bankroll can shrink from $1,000 to $500 while another's can grow from $100 to $200. The loser still has more money than the winner. But who's delighted to grab the money and run and who's dejected enough to chase the loss?

Professor Statman cites "dollar averaging" as an added factor. On an investment level, this suggests that a person with, say, $100,000 might divide it into 10 $10,000 segments and allot one of them to purchases per month. "If the stock market declined as soon as you have invested the first $10,000 you'll take comfort in the $90,000 you have not invested yet. If the market increases, you'll take comfort in the $10,000 you have invested."

Some gambling gurus advise the same approach for casinos. They advocate breaking a bankroll into parts. If one session runs amuck, you have the rest for subsequent games; if it goes well, lock up the profits and start again later with the next segment.

The shortcoming is that the chance of winning any given amount declines as the loss limit for a session decreases. If your gambling objective is to start with $500 and win $500, you have less chance of success in five games with $100 stakes than one game with a $500 buy-in. This philosophy sparkles, though, for bettors with the reasonable goals of maximizing the entertainment value of their casino visits by getting lots of playing time and earning modest profits, rather than shooting for the moon.

Professor Statman's ultimate advice? It boils down to this. First, know your weaknesses and be on guard against them. And second, overcome the pain of regret by cutting your losses now and moving on to what may be better luck later. The poet, Sumner A Ingmark, had the same sort of thing in mind when he wrote:
Good gamblers ostensibly,
Know how to act sensibly.