First published in Business Life, August 2009
Would you feel worse if you made a loss because you sold shares and they later surged in value, or if you didn’t sell them and they later fell? In other words, do you feel worse when things have gone wrong after you’ve taken action, or when things have gone wrong after you’ve been passive?
In surveys, most people reckon that they’d feel more regret after taking action that didn’t work out. (This is in stark contrast to the folksy wisdom that you always regret the things you didn’t do – not on the stock market, you don’t.) But hypothetical survey questions don’t always tell the truth about what people really do when money is on the line.
Economists and psychologists would both like to know how our actions – and our failures to act – are shaped by the desire to avoid feeling regret. That would be much easier to do if researchers could observe people making financially significant decisions in an environment that made it clear when mistakes were being made.
Such an environment exists, of course: the blackjack tables in Las Vegas. Two finance professors, Bruce Ian Carlin and David T. Robinson, recently published their analysis of decision-making at the blackjack table, using data from an in-house security system. (The system tracks cards and betting chips in an attempt to identify odd patterns of play that might signify card-counting or outright cheating.)
Blackjack – sometimes called vingt-et-un or pontoon – is the perfect game for the task. The aim of the game is to draw cards with a higher total face value than the dealer does – but up to a maximum of 21, above which the player goes bust.
Unlike poker or chess, the optimal strategy is fairly simple and well-known. Furthermore, the major choice a player faces is to act, by asking for an extra card, or not to act. Overactive play tends to result in the player going bust; overly passive play is easily beaten by the dealer.
The findings are clear-cut: in an effort to avoid regret, players tend to be too passive, preferring to sit pat on a low total and be overhauled by the dealer than to risk busting twenty-one early. Eighty per cent of deviations from the correct strategy are “passive mistakes” – players failing to take a card when they should have done so. The financial implications were large: players who stuck to the strategy won over $60,000 in total; those who strayed lost a total of over $55,000.
Some puzzles remain – notably, the fact that people often seem to trade too often on the stock market, when this research suggests a bias towards passivity. The research effort will continue – and economists will keep on applying for grants to go to Las Vegas.