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Loss Aversion: What to do about it?

I have written about loss aversion before.  It is the irrational tendency that people have to prefer avoiding losses rather than acquiring gains.  I know I have this problem, which becomes highlighted when I play poker.  I’m sure that if I could deal with it better, I would become a much better poker player.

Why do I believe that I have loss aversion?  The main reason has to do with “bluffing”.  I rarely bluff, and when I do, I usually do so with a hand that isn’t that bad, and always on the river.  Oh sure, I’ll play certain hands aggressively, especially when I have position at the table.  I do have some poker skills, and I’m not totally averse to losing.  But will I take a hand that is absolute crap and bet it big?  No way.  That proposition is way too risky for me. 

There is other evidence besides bluffing that indicates that I have a problem with loss aversion.  I rarely play for stakes greater than $.01/.2.  And I dwell on my losses much more than I savor my wins. 

What’s interesting is that when I’ve lost most of my money, my loss aversion decreases.  I tend to take much greater chances – still no bluffing.  Although I usually eventually end up needing to reload, I think this is not so much due to poor playing, but rather because when I have little money to bet I can’t play too aggressively.  I actually think that I probably play my best poker when I have very little money.  I wish I could play this way all the time, as if I have nothing to lose.  I imagine that the great poker players do.            

Why do I have loss aversion?  Who knows?  I know I don’t want to appear weak.  I know I don’t want to feel like I’ve wasted my time.  Is there a more scientific explanation?  According to some recent brain imaging research, the reason may have to do with the activity in the areas of the brain that play a role in the processing of emotions.  When a person is confronted with a situation in which he or she is uncertain, as in a game of poker, these parts of the brain can affect and sometimes “overpower” the parts of the brain that have to do with reasoning and deliberation. 

There was an interesting experiment conducted at Carnegie Mellon with patients who suffered damage to the areas of the brain that had to do with the processing of emotions.  These patients and a control group made up of people with no brain damage were presented with a series of fifty-fifty gambles.  For example, they would be offered a fifty-fifty chance of winning $1.5 or losing a $1.  The patients with brain damage accepted these types of bets, which are advantageous to take, more often than the people in the control group.  As a consequence the patients ended up making more money than the people in the control group.  This experiment indicates that sometimes it is to your advantage to have brain damage, when the damage is to the part of the brain that has to do with the emotions.

Is there anything that one can do about controlling the areas of the brain that have to do with processing the emotions?   Perhaps you can try to trick the brain with drugs, as was done with people in an experiment using the nasal spray Syntocinon.  Students were divided up into two groups, and asked to play what economists call “the trust game.”  In the trust game, the players who trust each other do well, but those who don’t trust each other don’t do well.  The individuals in one group were given the nasal spray Syntocinon, a drug that contains oxytocin, which scientists believes causes “stress reduction, enhanced sociability, and, possibly, falling in love” (see “Mind Games” by John Cassidy).  The students in the control group were given nothing.  Guess which group did better?  You got it.  The group high on nasal spray.

I’m not sure that trust is a quality that is helpful to win at poker.  But perhaps trust goes hand in hand with other emotional states, such as fear, which do play an important role in the game.  More trust, less fear, less loss aversion.  So perhaps next time I play poker, I should see if I can get my hands on some Syntocinon, and if I can’t score any, then a shot of hard liquor might do the job. 

For those of you who say “no” to drugs, I believe there is a drug-free way to tinker with brain chemistry to make sure your reason keeps your emotions in check.  And this way, my friends, is what Aristotle calls “phronesis,” or “practical wisdom”.  It is knowledge of the particulars, such as remembering what has been bet and what hands can beat you, and this takes practice.  Unfortunately, the Aristotelian route to mental equilibrium takes a lot more time and hard work.  But as Spinoza once said, “All things noble are as difficult as they are rare.” 

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Comments

3 Responses to “Loss Aversion: What to do about it?”

  1. sparky on February 12th, 2007 10:22 am

    Interesting post. Oxytocin is released naturally when women breastfeed – presumably to promote a nice, cuddly feeling with their baby. Also possibly after sex, if I remember my biology. Now there’s an idea!

  2. Suber on February 12th, 2007 10:36 am

    An idea indeed! George Costanza tried to eat and watch TV while having sex. Why not play poker and have sex? I say for the sake of science we must perform an experiment – more than once. My hypothesis, however, is that it will lower loss aversion, but too much to help with winning at poker. I think that for an aggressive activity like poker you need to have some level of fear and loss aversion. If you don’t, you’ll be like a boxer who has sex before a fight – happy but not hostile.

  3. QuietStorm on February 12th, 2007 4:53 pm

    Nice post. I don’t have much loss aversion. I view all the poker I will ever play as one giant game. One hand, either way, will not make that much impact. I have the same approach to other decisions regarding risk- investing, business decisions, home buying, affairs. I do draw the line when guns are involved. At that point, I become very risk averse.

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