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The psychology of gambling

Gambling is a bad financial decision. Most of us know that it’s a game that–at least in regulated places such as casinos–you can only win if you happen to be lucky. The odds are always against you. So why do people love it? In essence, because our brains are programmed to.

Psychology has examined how gambling, and the pursuit of rewarding activities in general, works. Just as there are different types of reward (and punishment), there are different schedules for doling it out: fixed interval, fixed ratio, variable interval, and variable ratio. Consider a rat that gets a food pellet sometimes when it presses a lever. In fixed interval, its gets a pellet every half-hour, say, no matter how many times it’s pressed the lever. In fixed ratio, it gets the pellet every ten lever presses. In variable interval, it gets the pellet after a random amount of time has passed, and in variable ratio, it gets the pellet after a random number of lever presses.

Researchers have used just this sort of setup to find out which type of schedule creates the most addictive behavior. They delivered the reward according to whatever schedule that rat was assigned to. Then, when the rat understood the setup, they stopped delivering the reward.

Rats in the variable ratio schedule pressed their levers the longest after the rewards stopped coming. If you think about it, it makes sense. If you know you’re supposed to get a reward after thirty minutes, or after thirty lever presses, you’ll stop. But if you think that just one more lever press might do it, you hang on longer.

This is exactly why gambling is so peculiarly addictive. It’s not like, say, constructing model airplanes, where if you know if you put in the time you’re sure to be rewarded, or like unpaid overtime at work when you know you won’t. The sweetness of gambling is the unexpected payoff. If you stop, you’ll never know if the next lever press, or hand of cards, would have rewarded you.

There’s a physiological reason that that unexpected reward is so appealing, and why we’re willing to give up time and effort and money for the chance of getting it. I’ll write about that. Sometime in the next few posts.

5 Ways our Brain Works to Wreck our Finances

1. Redefining Needs

Perhaps it’s marketing or perhaps it is our culture, but we’ve gone from wanting certain possessions to NEEDING them. Whether it’s a top model car or a specialty coffee, we confuse the difference between wants and needs. We only really NEED food, shelter, companionship, and a job to pay for the food and shelter. That’s it.

2. Psychological Addictions

Not all addictions are physiological. Some are much more complex. Smoke breaks are both times to smoke and a break. Often it’s the “break” aspect that helps people relax. The same applies with coffee breaks, impulse shopping, or gambling. These things make us feel better in our brain, and as a result, we become addicted to that feeling.

3. Unrealistic Understanding of Risk

Whether it is through denial or simply overconfidence, people often invest money they can’t afford to lose in investments that are at a higher risk Or, we assume because an investment has performed will in the past, it would

4. Procrastination Rationalization

Our brains are often magnificent at rationalizing actions or lack of them. This can keep us from acting at times that would most benefit us. We avoid making changes in the present that can benefit us in the future, and we always have “good” reasons.

5. Inability to Admit Mistakes

Because we often attach our own self worth to the effectiveness of our decisions, mistakes are viewed as diminishments of ourselves. Because of this and many other reasons, we tend to avoid admitting when we’ve made a mistake, which prolongs the time until we work to resolve it.