I never understood why people take more risks and make larger bets when they are losing at a casino. In what world does that make any sense, right? But in a casino or in a general gambling setting, people will lose so much money and will try to win it all back by making larger more risky bets and losing even more money. It seems like a vicious cycle, and that is how casinos make a lot of money….because the house always wins.
This is called risk aversion. People tend to be more risk averse with gains and more risk seeking with losses. Kahneman and Tversky wrote an article called Prospect Theory: An Analysis of Decision under Risk where they explored the idea of risk aversion and came up with the prospect theory value function, which show that the feeling after gains smooth out quicker than the feeling after a loss. The more that you gain has less value and the more that you lose has more value.
With this in mind, the fact that people don’t risk as much for gains but will seek risks for losses, casinos or people in general will take advantage. When people are losing they are focused more on gaining that money back so they will take more losses and will probably lose more. That is what casinos count on. They want people to lose their money in the casinos, helping them make a profit.
People know how it feels when they lose and when they win, because losses feel more bad than gains feel good. So next time you decide to go to a casino and/or gamble, be aware of how you are taking risks.