Risk Preferences And Motives

Many poker experts insist that we shouldn’t have risk preferences and other motives. We should unemotionally calculate the probabilities of winning and losing, multiply them by the amounts that we will win or lose, and then make the decisions that maximize our expected value (EV) and profits.

Of course, there are limits. Regardless of their EV, we shouldn’t make bets that are so large or risky that we can go broke or become too upset. But even within those limits we frequently can’t be completely rational. We’re hard-wired to have risk preferences and many motives, including quite irrational ones. I’m using the word, “irrational,” in the narrow sense of reducing profits.

A few people have very irrational risk preferences and motives. Maniacs take absurd risks for the sheer kick of gambling, and rocks fold +EV hands and draws because they’re so afraid of losing. And many recreational players just want to have fun. We’ll ignore all of them and focus only on profit-oriented people like you and me.

This article is based on books by two Nobel Laureates in Economics. Richard Thaler’s Misbehaving described two types of decision-makers, purely rational “Econs” and emotional, irrational “Humans”. Many poker experts say that we should act like Econs, but Thaler’s book and Kahneman’s Thinking Fast and Slow provide overwhelming research evidence that everybody makes decisions like irrational Humans.

You may think, “That’s obvious,” but for more than two centuries economists insisted that everybody had only one dominant motive, to maximize utility. Many poker writers applied that principle and assumed their readers just wanted to maximize their profits.

When EV Is Identical

Kahneman began discussing risk preferences by asking readers to make choices in two problems.

“Problem 1: Which do you choose?
Get $900 for sure OR 90 percent chance to get $1,000

“Problem 2: Which do you choose?
Lose $900 for sure OR 90 percent chance to lose $1,000”

Even though the EV in both problems is identical, most people choose the sure thing in Problem 1, but pick the 90 percent chance in Problem 2.

Why?

Kahneman wrote: “Loss aversion refers to the relative strength of two motives: we are driven more strongly to avoid losses than to achieve gains.” We choose to avoid risk when the outcome is positive because we don’t want to risk losing a pleasant outcome. However, when the outcome is negative, we prefer to take chances – even foolish ones –to avoid the pain of losing.

When One Alternative Is Much Better

People were offered an apparently no-brainer bet:”50 percent chance to lose $100 and 50 percent chance to win $200.” Since the EV is so positive, we would expect nearly everyone to take it, but most people rejected it.

Their decision is obviously irrational. Any Econ or poker expert would always take that bet. However, the decision to reject it is not that unusual. Even when one alternative is much better, investors, even professionals, often make that mistake. “Finance research has documented a massive preference for selling winners rather than losers.” Selling winners is obviously irrational since stocks that have recently gone up are much more likely to go up than ones that have recently gone down.

Selling a loser hurts investors’ egos. It essentially admits that they made a mistake when they bought it, and nobody likes to admit mistakes. Selling a winner makes investors feel good. They made a good buying decision, and they’re locking up their profits.

Sunk Cost Fallacy

Investors aren’t the only people who don’t want to admit mistakes. Once people make many kinds of commitments, that irrational desire causes “The Sunk Cost Fallacy.” Kahneman said that this fallacy “keeps people for too long in poor jobs, unhappy marriages, and unpromising research projects.”

Many poker experts insist that we should ignore sunk costs, that once we put a dollar into the pot it isn’t ours any more. It’s just like every other dollar. Yet most poker players can’t think that way, even if they claim they do.

Yielding to the sunk cost fallacy is particularly irrational for poker players because it’s so easy to adjust. It’s hard to change jobs, spouses, or research projects, but all you have to do in poker is fold your cards or go home.

This fallacy causes three common and irrational mistakes:

Chasing with bad odds.

Making bad river calls. Players often think, “I know I’m beaten, but have to call.”
Playing longer sessions when losing than when winning.

You’re much more likely to continue winning than to start winning when you’re losing. First, winning suggests, but doesn’t prove, you have an edge against these players. Second, winning creates a psychological edge. People naturally fear winners and attack losers. Despite these facts, losers keep playing, and winners go home.

Everybody makes all three mistakes. Weak players make them much more often, but we’ve all made all three. Some people claim to be unaffected by whether they are winning or losing, but they’re kidding themselves. They may not take the desperate chances that losers take, but even they have an irrational need to avoid losses. The dumbest words in poker are, “I’ve got to get even,” and nearly everyone has said or thought them.

Meeting A Goal Versus Exceeding It

Many poker experts insist that all cash game chips have equal value. There’s no difference between winning the first chip, the one that hits your goal for the session, or the one after reaching your goal.

That’s true for Econs, but not for Humans. Kahneman wrote; “The aversion to the failure of not reaching the goal is much stronger than the desire to exceed it.” Research showed that professional golfers tried harder to make putts for pars than birdies.

Missing a par putt causes a bogey, a failure. Missing a birdie putt causes a par, the standard “goal” for each hole. You may think there wouldn’t be any difference, but the data were overwhelming.

“Whether the putt was easy or hard, at every distance from the hole, the players were more successful when putting for par than for a birdie … If in his best years Tiger Woods had managed to putt as well for birdies as he did for par, his average tournament score would have improved by one stroke and his earnings by almost $1 million per season.”

You may doubt the relevance of that research to poker, but you’d be yielding to a common delusion: “Poker is different from everything else.” It’s not. The same irrational motives and cognitive errors that affect other decisions cause poker mistakes. You, I, and every other poker player are Humans, not Econs. We do have varied motives and risk preferences, and they repeatedly cause us to make irrational, -EV decisions.

The Bottom Line

We can’t become totally rational, but we can become less irrational by understanding how our risk preferences and other motives affect our decisions.

Repeatedly ask yourself four questions:

What are my risk preferences and motives?
When and how do they cause irrational decisions?
How are they affecting me now?
How can I resist them? ♠

After publishing five expensive poker books, Dr. Al, [email protected], now writes inexpensive eBooks. How to Beat Small Poker Games, Stay Young; Play Poker, How to Beat Killed Hold’em Games, and Business is a Poker Game cost only $2.99 at Amazon.com. Please comment on my new website, Dr-Al-Schoonmaker.net.