How and why we make decisions in betting

In classical economics, the laws of probability are presumed to underlie decisions involving risks and rewards in business and personal affairs. Even without the background to appreciate let alone do the math, people ought to be able to trade-off costs and benefits reasonably well. And society as a whole, manifest by population trends, ought to act pretty much as the supercomputers at the think tanks foretell. It doesn't happen like this, of course. And economists, seeking better ways to anticipate behavior, have dedicated careers to studying why not.

"Utility" theory offers some answers. This holds that individuals may not balance apparent risks and rewards because the amounts may not reflect what they consider their practical worth.

In gambling, for instance, the laws of probability deem a $100 bet "fair" at a 10-to-1 payoff, $1,000, when odds against winning are also 10-to-1. Fighting the same odds for an $1,100 payoff would favor the player with a 9 percent edge. But particular gamblers might spurn either or both propositions. Perhaps $100 seems too much to lose, $1,000 or $1,100 too little to win, or 10-to-1 too great to overcome. Utility accommodates adjustments in one or more of the three elements. Solid citizens might ponder how much they're willing to risk for some reward at what odds. Maybe $25 to win $1,100 despite 50-to-1 odds. Or $100 going for $5,000 at 55-to-1. Or $6 to win $7 at 6-to-5. Or, as at the slots, $1 to win $50,000 knowing only that the chance is remote.

The reasoning behind these kinds of decisions is poorly understood. Utility is therefore descriptive, not predictive. But an emerging field of research, neuroeconomics, is beginning to offer some clues. It addresses such puzzles as why risking $10 to win $100 differs from betting $10,000 to earn $100,000 even when the odds are the same in each case. Or why the hope of a $1,000 gain may not offset the fear of a $1,000 loss. Or why hazarding $1 to win $1 million at a highly adverse 2,000,000-to-1 might be more appealing than venturing $1 to win $100 at a fair 100-to-1.

Neuroeconomics utilizes magnetic resonance imaging (MRI) and other technologies to scan the brain while a person is making economic decisions. Early experiments suggest that the brain's neural activity is strongly correlated with the amount of money at stake. Likewise, that prospects of gains and losses activate different areas of the brain. Similarly, that probabilities of victory and defeat are evaluated independently of the amounts involved. Further, that separate parts of the brain operate when the chance of an event is known, as opposed to being fraught with varying levels of uncertainty. Brain scans are also illuminating the mechanisms governing how amenable people are to taking risks and tolerating the unknown, as well as the extent to which they derive pleasure from alternate degrees of success.

In one test that hints at where all this may lead, participants received some money and had to decide how much of it to offer to share with a second player. The offer would be one-time only. Both knew they could keep the money were the deal accepted, but had to return it were the proposal rejected. The object was to offer the minimum to which the second player would agree. Neural scans revealed that when players accepted tenders they later said were fair, brain circuits were activated that generally support deliberative processes. When they turned down bids, a portion of the brain that monitors certain bodily conditions overrode the deliberative circuits. The more strongly the "bodily" neurons fired, the faster the person rejected the offer. This explained a phenomenon that otherwise appears to make no sense. Players rejected low offers, while they logically should accept anything: something being better than nothing. The brain scans showed that intrinsic mental activity creates an incentive to punish an opponent for an inadequate offer rather than feel cheated.

These advances have the potential to help us understand and optimize our behavior, but they also invoke the specter of mind control. A riddle thus resolved by the rhymer, Sumner A Ingmark:

The more about yourself you know,
The less you're apt to be brought low,
By those who'd deal a harmful blow.

Neuroeconomics: Is Gambling Entering a Brave New World?