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Choiceology: Season 4 Episode 4


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Risky propositions tend to look different when you’re already behind.

In this episode of Choiceology with Katy Milkman, we look at how framing a decision based on what you stand to lose versus what you stand to gain affects your tolerance of risk.

  • Luis Green was a contestant on the popular TV game show Deal or No Deal. The game is largely one of chance, but there are moments during play where the contestant has an option to accept a cash offer to quit. At one point in the game, Luis was offered $333,000 to simply walk away. A guaranteed win! It seems like an obvious choice. But as you’ll hear from the story, there are other factors that influenced his decision.
  • Katy illustrates these factors with a version of a famous experiment. Volunteers are presented with two differently worded but mathematically identical scenarios. A simple shift from framing the scenario as a potential gain to one of potential loss results in starkly different choices from the volunteers.
  • Next, Katy speaks with special guest Daniel Kahneman about the underlying theory that explains human behavior in these types of situations. Daniel Kahneman is a professor of psychology and public affairs emeritus at the Woodrow Wilson School and the Eugene Higgins Professor of Psychology Emeritus at Princeton University. He was awarded the 2002 Nobel Prize in Economics for his pioneering research with Amos Tversky. Their work helped establish the field of behavioral economics. Kahneman is also the author of the bestselling book Thinking, Fast and Slow.
  • Finally, Katy speaks with Colin Camerer about some of his favorite studies on risk seeking in the domain of losses, as well as practical approaches for avoiding this less-than-ideal behavior. Colin Camerer is the Robert Kirby Professor of Behavioral Finance and Economics at the California Institute of Technology, where he teaches cognitive psychology and economics. You can read his paper “Prospect Theory in the Wild: Evidence from the Field” here.

Choiceology is an original podcast from Charles Schwab.

If you enjoy the show, please leave a rating or review on Apple Podcasts.

Click to show the transcript

Howie Mandel: Let me just say something—this is going to be your final offer. Listen to me. There’s only two cases left in play. One case is worth $750,000, and one case is only worth $5.

Luis Green: Let me see an offer.

Howie Mandel: Hello? OK. OK. Last offer, $333,000.

Speaker 3: Take it!

Speaker 4: Take the deal! Take the deal! Take the deal!

Howie Mandel: For the last time in this game, Luis Green … deal or no deal?

Speaker 3: Take it!

Katy Milkman: That’s a nail-biting decision faced by one contestant on the game show Deal or No Deal. What should he do? What did he do? Today, we’re looking at how your approach to risk changes based on whether you’re focused on what you stand to gain or what you stand to lose. You’ll hear from contestant Luis Green on the thinking behind his agonizing choice. And to help dissect these types of decisions, I’ll be speaking with Nobel laureate Daniel Kahneman. Daniel and his friend and colleague, the late Amos Tversky, were the first to explore how gains and losses distort our judgment. They founded the field of behavioral economics, which means we couldn’t have a podcast about behavioral science if it weren’t for Danny. So we’re thrilled to have him on today’s episode.

I’m Katy Milkman, and this is Choiceology, an original podcast from Charles Schwab. It’s a show about the psychology and economics behind the decisions people make. We bring you true stories involving high-stakes decisions, and then, we explore the latest research in behavioral science to help you avoid costly mistakes and achieve your goals.

Luis Green: So I’m in the backstage. I’m just kind of waiting. And then, the adrenaline is pumping. You see all these people cheering. They’re yelling.

Katy Milkman: This is Luis.

Luis Green: Hey, how’s it going? My name is Luis Green. I live in Jacksonville, Florida, and I was a contestant on the game show Deal or No Deal.

Howie Mandel: Welcome to Deal or No Deal!

Katy Milkman: If you haven’t seen it or played the board game, Deal or No Deal is a show where contestants select sealed briefcases, one at a time, from a group of 26. Inside each case is a card depicting a certain amount of cash, ranging from one cent all the way to one million dollars. Contestants choose a case, but they have no idea how much money is inside.

Luis Green: It really was just pure excitement, meeting Howie in person.

Katy Milkman: Howie is Howie Mandel, the host of this high-energy, high-drama show.

Howie Mandel: I’m Howie Mandel, and it has been a long time since I said these words.

Luis Green: And it’s surreal because everything that you see and hear is exactly what somebody at home hears at the same time. So the music, the dun, dun, duh. All of it—it’s live. So it really kind of makes you feel like you’re really in a TV set. I mean, it was intense.

Howie Mandel: I love doing this.

Luis Green: When the game starts, I’m actually behind the red button, the Deal or No Deal box, and to the left of me you see all of the Deal or No Deal models, just smiling, posing. And then, you have the game board that shows you all the amounts, and I would say that my eyes were just kind of fixated on the million dollars. I was like, “Oh, you’re mine.”

Katy Milkman: Deal or No Deal is a game of chance. The contestants can’t see what’s inside the briefcases. They only see what’s remaining on the game board after a case has been opened. But there’s one important twist.

Luis Green: So you start off the game by picking a case that you feel has the million dollars, and then, that’s the case that’s placed on the table. Then, the rest of the cases are out, being held by models. So what you do is you go through a round of eliminations where you eliminate a certain amount of cases, and then they’ll give you an offer—the banker, as they call her.

Katy Milkman: That’s the twist. The banker character tries to tempt the contestants to accept an offer of cash in exchange for not continuing the game. The banker’s offers dangle lower amounts of cash than players could potentially win if they kept playing and got lucky. So the contestants have to grapple with the decision to go with the banker’s offer, which is a sure thing, or hold out for the possibility that they’ll win a larger sum. If they take the risk, they could easily end up with a tiny amount of money. It’s agonizing to watch.

Luis Green: So my plan was to win the million dollars. We started thinking kind of like what are we going to use it for? My mom had cancer—she’s actually clear now—so we were planning on using that for some of the medical bills that kind of came unexpectedly. We’re planning on giving some of the money to my mother-in-law, giving our church 10% of it. And really just paying off some debt on our end. I mean, I’d probably go get myself a suit or something cool like that. Maybe go on a vacation.

Howie Mandel: This is going to be a great holiday because one of those cases is holding one million dollars.

Luis Green: So Howie turns around and he says …

Howie Mandel: All you have to do is pick the one case that you think has a million dollars in it.

Luis Green: I’m picking the case that I believe contains the million dollars, and I turn around and I said 10! And I was so sure of it. I was like, “10’s the one!”

Howie Mandel: Well, let’s find out if it’s meant to be. You’re choosing number 10.

Luis Green: 10!

Howie Mandel: Vaeda!

Luis Green: Back in high school my number for volleyball was 10, and then, my football number was also 10 for my jersey. I just felt like that was going to be the right one, and you convince yourself that this isn’t a chance thing, you know, the million dollars is in 10.

Katy Milkman: So the number 10 case was set aside unopened for later.

Luis Green: So in the first round there’s six cases I needed to pick to eliminate. I was always trying to pick a number that was lower. So a case that held a small amount of money in it to be eliminated. So some of the smaller amounts in the cases would be a penny, 10 cents, $5, $10, $100, $1000, $10,000. Those are all in the smaller numbers relative to the game. So as we jump into the first round everybody was screaming, and then, it gets kind of quiet as I’m starting to select the cases.

I just remember going case to case, and I think the first couple were actually in my favor. And every time that I saw a small number, I just get this burst of excitement like, “Yeah! Great! It’s going to go in my favor.” Then, right in the first round, the million dollars comes off the board. And it’s like everybody was really, really quiet, and you hear, “Oh!” But to me, it was like nothing else was there. It was like tunnel vision as I was looking at the million dollars. And I was like, “Man, I feel like I lost.”

Katy Milkman: Let’s pause here for a minute. Luis came into the game with zero dollars of winnings, and there’s no possibility of losing money. He was only ever in a position to gain—though it’s possible he might have only gained a penny. But he was so focused on the million dollars that he felt like he already had it in case number 10. When the actual million-dollar case was eliminated, Luis felt like he’d lost a million dollars. All of this, despite the fact that he could only gain money from his starting position of zero. But for this story to make sense, it’s important for you to understand his mind-set. Anything less than a million-dollar prize felt like it would be a loss to Luis. OK, back to the action.

Luis Green: I just remember my heart kind of dropped, and I looked over at Tia, my wife, and she just kind of looks at me like, “Ah.” You know like, “What are we going to do?” And I think she had kind of the same feeling; we felt like we really lost at that moment. It’s kind of hard to describe how it feels due to the fact that it’s not your money. You feel like it’s your money because you’ve kind of thought about what you’re going to plan on doing with it in the future. So when I lost the million dollars, everything just kind of rearranged in my brain, and then I turned around and then, Howie, he’s like, “It’s OK, you know, there’s still a lot of huge cases.” And then started kind of rattling off some of the cases that were smaller than a million but still, I mean, life-changing numbers for sure.

So after I opened the cases, the banker comes back and offers me $12,000.

Howie Mandel: $12,000 is yours, guaranteed. You’ve been here for …

Luis Green: So to me, it was such a small amount. You look at the numbers that are on the board and kind of what’s being offered to you. I still see that there’s a lot of chance for the $750,000 or anything under that. So I had a big no-deal.

“No deal!”

Howie Mandel: No deal!

Luis Green: And I slammed the little box on top of the red button and continued to move into the second round. As I go through round one, two, three, the offers climb and climb and climb. And as I see the numbers, I mean, you can tell I’m in the big numbers, numbers that I’ve never had in my bank. You know like, “Oh, that’s cool. How can I get more?”

Katy Milkman: Luis is seeing briefcases with small dollar amounts being eliminated. This means that there’s an increasing chance that the banker will offer him a larger amount to quit.

Luis Green: The million dollars is gone. I’m like, “OK, well, maybe I can replace that with the $750,000.” You know? So the banker offers me $217,000 to walk away at this point, guaranteed money. If you walk away, take the deal, you’ll walk away with $217,000.

Katy Milkman: If someone you trusted offered you $217,000, no strings attached, would you take it? Most likely, right? That’s a big gain. But Luis had his mind set on a bigger number. In fact, since he’d been so fixated on a million-dollar prize, in a sense $217,000 felt like a $783,000 loss. It was that much less than the million he’d decided he was going to walk away with.

Luis Green: I took a risk and I slammed the case down and said, “No deal!” And I ended up opening up the next case, which had a small amount in it, which worked in my favor.

Katy Milkman: This was a good thing because that meant that there were still high-value cases to come.

Luis Green: So we’re in the final round, and at this point it felt like my luck had kind of turned around. So now you fast forward all the way to two cases left. There’s 50/50 odds, and there’s never better odds in the game than 50/50, right? Up to this point, the odds are always against you no matter what. So there’s two cases left. There’s a case that contains $5 and then a case that contains $750,000.

So the banker came back with an offer of $333,000.

Howie Mandel: Last offer, $333,000.

Luis Green: When the $333,000, everybody’s like, “Wow! Take the deal!”

Speaker 3: Take it! Take the deal!

Speaker 4: Take the deal! Take the deal! Take the deal!

Luis Green: My mom, I turn around … well, she’s been saying take the deal since early on in the game. “Take the deal, honey! Take the deal.” And my brother, he’s like, “Take the deal! Luis, that’s a lot of money! Take the deal!” You know, I got to turn down one more to get to the end of the game, just to see kind of what’s in 10—which in my head $750,000 was in 10.

Katy Milkman: Luis had a feeling that his initial pick, case number 10, contained the $750,000, and that the $5 case was still on the platform. Remember, in his head, Luis is not choosing between $333,000 for sure and a 50% chance of $750,000. He’s thinking about everything relative to the million dollars he had his heart set on from the start. So to him, this feels like a choice between a 50% chance of losing $250,000 versus a sure loss of $667,000. He’s framed this whole decision around that million bucks that slipped away.

Luis Green: So to me, $333,000 just really felt so much smaller than the million dollars. I said, “My counter is no deal.”

“This is my counter. No deal!”

Boom, and I slammed it down. They were like, “Oh my God!” Everybody’s going wild. At this point, Howie says, “Luis Green!”

Howie Mandel: Luis Green, you’re going home with …

Luis Green: He grabbed my case. He unlocks it, and he said, “Luis Green, today you’re walking away with …” And it drops.

Howie Mandel: $5.

Luis Green: $5.

Howie Mandel: There it is there. I am so sorry, buddy. Luis Green …

Luis Green: No one in the entire crowd said anything. Everyone was just in shock. And I just remember I’m in shock. I’m like I don’t know how to process what’s going on. Then, I go backstage, and we’re all sitting, and my mom comes next to me, and she’s upset. Everybody is just so down, you know? Even people backstage were just so upset. Everything just doesn’t seem as bright. Your heart’s still sunk, and you’re wondering, “When’s my heart going to come back up?” You feel like crying, but I have a hard time processing these emotions.

It doesn’t change the decision I made. Let’s say you took away all of the surroundings, you took away the camera, you took away Howie Mandel, you took away the stage, and somebody came to you and said, “Luis, in one hand $750,000, or there’s $5 in the other hand. You can choose 50/50 or walk away right now with $333,000.” I think in that situation it’s so much easier to just say, “I’m walking away with $333,000.” Because you haven’t invested anything. But I think when all of the other pieces kind of came into play, the interviews, the talking and dreaming and all this other deliberation, it really skews logic.

Katy Milkman: Luis gambled and lost almost everything he’d had his heart set on. Of course, the odds were 50/50. He could just as easily walked away with $750,000 rather than a paltry $5. It wasn’t crazy to take the chance, but it sure was risky. Today, Luis is circumspect about the experience. He even has a sense of humor about it all.

Luis Green: So the $5 winnings came to me in a check—non-taxed, mind you. And we placed it in our living room. We framed it as the most expensive $5 bet I ever took.

Katy Milkman: Luis Green appeared on the game show Deal or No Deal in late 2018. He lives in Jacksonville, Florida. Clips from the Deal or No Deal episode are courtesy of NBC Universal.

It was a crazy moment, right? Luis was offered $333,000 to just walk away, but instead, he chose the 50/50 option. He knew that the case he chose would contain either $750,000 or $5. A huge risk. Now, you might be saying to yourself, “If I were in Luis’ shoes, I would have taken the $333,000.” And that may be true, but most people, if they framed this decision the way that Luis did, will be a little more willing to gamble than usual in a situation like this. You see, Luis felt like he’d already lost a million dollars, even though he had never had it in the first place. That sense that he was in the hole, and no matter what he did he’d end up feeling like he’d lost, changes the way we consider risks.

When you’re thinking about gambles in terms of losses, you tend to seek riskier bets. Let’s look at another example of this tendency. We’ve presented two scenarios to several volunteers and asked them to choose between two options in each scenario.  

Speaker 6: Imagine that the U.S. is preparing for an outbreak of an unusual disease, which is expected to kill 600 people. You’re an epidemiologist, and you’ve been asked to choose between two different programs to combat the disease. The estimates about success are exact. If you choose Program A, 200 people will be saved. If you choose Program B, there’s a 1/3 probability that 600 people will be saved and a 2/3 probability that no one will be saved. Which of the two programs would you favor?

Speaker 7: I’m just thinking about it. I’ll choose Option A because it seems guaranteed in comparison to Option B, and you know how successful it will be.

Speaker 8: I think … Hmm. I’d have to go with Program A because there’s just 100% probability that you can save 200 people. So it’s a much better chance of actually saving some people rather than no one at all.

Speaker 6: Imagine that the U.S. is preparing for an outbreak of an unusual disease, which is expected to kill 600 people. You’re an epidemiologist, and you’ve been asked to choose between two different programs to combat the disease. The estimates about success are exact. If you choose Program A, 400 people will die. If you choose Program B, there’s a 1/3 probability that nobody will die and a 2/3 probability that 600 people will die. Which of the two programs do you favor?

Speaker 7: That’s a really hard choice. I think I would have to go with Option B because the chance of saving everyone is worth taking.

Speaker 9: I’m an Option B guy. A is a guarantee of death. Option B is a maybe guarantee of more death, but not necessarily. So it’s the optimistic choice.

Katy Milkman: Did you see what happened there? If you take those two scenarios and really look at them, they’re mathematically identical. 200 lives saved is the same as 400 lives lost, when there are 600 lives at stake. And yet, in the first scenario, people tended to choose the first option—200 lives saved. And in the second scenario, they tended more often to choose the riskier second option of a 1/3 chance that no one would die and a 2/3 chance that everyone would die.

They’re the same scenarios just framed differently. This is actually an incredibly famous problem, which Amos Tversky and Danny Kahneman presented to volunteers in the 1970s to establish how dramatically our taste for risk changes when we think about the very same decision with a focus on losses instead of gains. Kahneman and Tversky used this and other experiments to demonstrate that people systematically choose riskier bets when making decisions that involve losses rather than gains. This tendency is incorporated into a seminal model they developed called Prospect Theory.

Prospect Theory differs from standard economic theory in a number of ways. But the distinction we’re focusing on in today’s show is that people are risk seeking in the domain of losses but risk averse in the domain of gains. That means, strangely, that there are situations in which someone will reject a gamble in favor of a sure thing when focusing on what they stand to gain. But when they focus on what they stand to lose, that same person will change their mind and pick the gamble. It’s a peculiar pattern, and it’s been called the reflection effect.

I had the honor recently to speak with Danny Kahneman about his research on Prospect Theory, and more specifically the reflection effect. I sat down with him at his apartment in New York City.

Can you explain what risk seeking in the domain of losses means, and why this is a bias?

Daniel Kahneman: Well, risk seeking in the domain of losses means that people prefer a gamble when they’re choosing between a gamble and a sure thing. So if you have to choose between losing $900 for sure or losing $1000 with a probability 0.9, people will prefer the bet. That’s really very common. It’s a strong result. And I’m not at all sure that it’s a bias. I mean, any decision that is based on gains and losses can be viewed as a bias because in principle, you would make decisions based on final states of how wealthy a person would be when the gamble is resolved. So anything that’s not that is considered bias.

And that includes risk seeking and the losses, but otherwise, it’s completely reasonable. People are not shocked when they think about what they’re doing. This is not something that people really consider wrong.

Katy Milkman: That’s interesting.

Daniel Kahneman: And I don’t think … I think would be sort of narrow minded for anybody else to consider it wrong.

Katy Milkman: So what gave you and Amos the idea to look at this?

Daniel Kahneman: Well, we were looking at preferences for gambles, and initially we were looking at only at positive gambles, which had been traditionally the case. People had looked only at positive gambles. And we had a pretty good idea of how positive gambles work and the preferences. And one day, Amos had the idea of, “Oh, let’s see what happens with losses.” Right away it became apparent that everything that we knew about positive gambles was the mirror image of that was true about negative gambles.

So with positive gambles, if you give them a choice between $900 for sure or 90% chance to get $1000, most people don’t hesitate for a second. It’s perfectly clear that you want the $900 for sure. So that’s risk aversion in the domain of gains. And the preference that we talked about earlier, the preference of gamble, if you reverse all the signs, we call that the reflection effect. And we really went through the reflection effect in one afternoon because it was—we were always our own subjects—that is, we had a pretty good idea that if the two of us agreed on anything, then, very likely, the rest of human kind would too. We confirmed that.

It turns out, by the way, that people had known about it. We were not the first ones to discover it. But people hadn’t made anything out of it. We were, I think, the first ones to realize that this was really important.

Katy Milkman: That’s really interesting. It’s also interesting to me that you said that when you tell people about it, it feels intuitive. It doesn’t feel like a bias, this reflection effect. Why do you think it is that it feels intuitive to people to flip their preferences when they’re making choices over gambles in the domain of losses versus gains?

Daniel Kahneman: Well, it’s natural for people to think in terms of gains and losses. Now, I once constructed a problem where it shows that if you have those preferences, you can construct a gamble where people will really violate their central normative principle of dominance.

Katy Milkman: Just to explain what Danny means by the normative principle of dominance, he’s basically referring to an economic principle saying people should be fully internally consistent in their choices. You shouldn’t be able to trick people into changing their mind by rephrasing a question or reframing a gamble.

Daniel Kahneman: You can make up two problems such that one of them is in the gains and the other is in the losses, and people have the standard preferences on both. Then, they end up violating dominance. They end up with a gamble that is sure not to be the best. So in that sense, it’s not normative. But the psychology of it is really very obvious. And the psychology of it is there are two aspects that contribute to this, I think. One, the psychological value of $900 is more than 90% of the psychological value of $1000. Now, that’s for gains. But it’s also true for losses. That is that when you think of losing $900.

And so, relative to that, the extra $100 that you may lose doesn’t look like much, but the chance of not losing it all becomes very attractive. And who should say that people should not have that kind of preference, except it does get them into trouble under some conditions.

Katy Milkman: Fair enough, but you’re OK with human nature.

Daniel Kahneman: I’m, you know …

Katy Milkman: At peace with it.

Daniel Kahneman: It is generally true that there is a general principle here, which is whether you allow people to have preferences on isolated problems. I mean, in principle a fully rational person would not have preferences for isolated problems. They would have a broad view with a consistent policy about everything. And that broad view would end up being standard utility theory, would end up being the theory that decision theorists and economists assume that governs people’s behavior. Except it doesn’t. So if you drop that requirement, then you allow people basically to look at problems one at a time. Then, they have preferences one at a time, and it can get them into trouble. But each preference on its own feels reasonable to people.

Katy Milkman: That’s really interesting. So you mentioned you don’t think it’s a bias necessarily and people are entitled to have their own preferences and everybody feels OK with the reflection effect. But one of the things that is interesting to me, right, is when people use it as a tool of influence to try to make the argument for their preferred policy, say, right? So, someone is trying to convince you to take up insurance, or not to take up insurance, and as a result they frame it one way or another. And I always want to advise my students, “How do you make your best decision, the decision you’ll feel best about in the long run in the face of framing tricks someone might play on you?” What kind of advice do you give? I know what I say, but I’m very curious.

Daniel Kahneman: Well, I mean, the standard advice would be that when you get a problem that’s framed in a particular way, if it’s important, you should ask yourself, “Could it be framed in other ways, and would that make a difference to my choices?” And if you find that it could be framed another way and that it would make a difference to your choices, then you have a problem.

Katy Milkman: Exactly. So how do you resolve that one?

Daniel Kahneman: And the problem does not always have a solution. That’s exactly what I was telling you about. That you may have strong intuition about gains and strong intuitions about losses and no intuitions about final states that would resolve your problem. And when you encounter that, then clearly you have sort of a philosophical, normative problem to solve as to what your values truly are.

Katy Milkman: Mm-hmm. OK. That’s really helpful. The last thing I wanted to ask you is why you think it happens?

Daniel Kahneman: I think that framing generally happens because people accept what they hear as the standard formulations. Normally, we don’t go about life generating alternatives that, you know, he said it this way, but he could have said it that way. That’s not what we do. We understand what was said, and we respond to the surface message …

Katy Milkman: Context, yeah.

Daniel Kahneman: … not to the deep message that would be frame-free.

Katy Milkman: But why do you think we also exhibit the reflection effect? So why do you think that happens?

Daniel Kahneman: Well, I mean, the reflection effect is basically because of the psycho-physics of quantity or the psycho-physics of numbers.

Katy Milkman: As a quick aside, when Danny says “psycho-physics,” he’s referring to the way we psychologically react to a concrete objective thing, like a number. So hearing 100 makes you think, “That’s big.” And hearing one million makes you think, “That’s huge.” That qualitative emotional reaction you’re having doesn’t always precisely map onto the quantity though. And the squishiness of your reaction to a concrete construct, like a number, can lead you to behave in funny ways.

Daniel Kahneman: So if I ask you which is the bigger difference—between zero and 100 or between 900 and 1000—then you may know that they’re equal, but psychologically they’re not. It’s very obvious that zero to 100 is a bigger difference than 900 to 1000. So numbers have psycho-physics in terms of the strength of your reaction to numbers, which is clearly not proportional, and therefore is not mathematically accurate. But there is a serious question about “What are those gambles?” and “What are those problems?” And my impression has been for a long time that these questions have to do with the psycho-physics of numbers. They actually may not have all the much to do with values, but they’re about the numbers themselves.

Katy Milkman: This was great. Thank you, Danny.

Daniel Kahneman: OK.

Katy Milkman: This was really, really fun for me. So thanks for taking the time. I appreciate it.

Daniel Kahneman: No problem.

Katy Milkman: Daniel Kahneman is the Eugene Higgins Emeritus Professor of Psychology and Public Affairs at the Woodrow Wilson School at Princeton University. He won the 2002 Nobel Prize in Economic Sciences and in 2011 wrote the bestselling book Thinking, Fast and Slow. I have a link in the show notes and at

The reflection effect—or the human tendency to be risk seeking in the domain of losses but risk averse in the domain of gains—has been studied in many different contexts since the pattern was first identified in the late 1970s. To learn a bit more about the research that solidified this big discovery, I spoke with Cal Tech Professor Colin Camerer. Colin has been particularly interested in the way this bias affects high-stakes decisions, like the one we saw on the Deal or No Deal stage.

Hi, Colin, thanks so much for being on the show. I appreciate it.

Colin Camerer: My pleasure.

Katy Milkman: What’s your favorite study that looks at risk seeking in the domain of losses and risk aversion in the domain of gains?

Colin Camerer: OK. The cleanest studies, to me, that show risk seeking in the domain of losses have to do with breakeven effects, where people will take more and more risky gambles in order to kind of get back to zero, because it’s a feeling of, you know, “I don’t want to leave the race track having lost money. I don’t want to leave the casino.” And so, in fact, there’s two studies about 40 years apart. In the early 50s, there was a study about horse race betting. And the basic facts about horse race betting in America are it’s pari-mutuel, which means everybody bets on a horse. The track takes out 15% or 20% to pay the bills and then returns the losers’ money to the winners. So if you’re an average better, which on average you are, you’re going to lose about 15% or 20%. Old style was there were maybe nine races a day at Santa Anita or Philadelphia Park. And over the course of the day, most people have lost money.

And if they’re really eager to break even, what you’d expect to see would be there’d be a big shift to betting on long shots. So long shots are horses who you could bet $2 and you have a chance of winning, 50 to 1 odds, you could win $100. And you lost $100 that day—you’d break even at the end. So you can actually see a shift in betting toward the end of the day because people want to leave the race track that day and be able to go home and say, “I didn’t lose a penny. I got back to zero.” Even though some of these people are going to come back to the race track the next day. So there’s an element of sort of mental accounting of when it is you kind of close the mental account and say, “I’m done. I broke even.”

Now, fast-forward 50 years later, and Jaimie Lien did a beautiful study with, I think, the riverboat gamblers in the mid-west. And she has data from loyalty cards. So she knows if you go gamble in a casino when you swiped in, how much you bet, when you swiped out, and how much you won or lost. And if you plot a little graph of the amounts that people leave having won or lost, there’s a huge spike at zero. There’s a sad little distribution of like, “I won $50 or $100 or $200.” And then there’s a big gap where almost nobody leaves having lost $5 or having lost $10 or having lost $20. Because what they’re doing toward the end is gambling more and more aggressively to try to get to zero.

And as you go into the left part of the graph, what we call the left tail, there’s another sad little high spike at people losing more than a couple hundred dollars. Because again, when you’re doing all that hectic end-of-the-race-track day or end-of-the-casino day to try to get back to zero, you’re taking more and more risks or maybe bigger risks. And there’s a spike in people who do get back zero, but then there’s a spike of a bunch of losers who lost everything in their wallet or whatever they could charge on their credit card.

Katy Milkman: Any advice on how to avoid risk seeking in the domain of losses?

Colin Camerer: Yes, actually. I think, so this is, to my knowledge, not been carefully studied, other than in my own imagination. But I have a hunch that part of mental accounting, whether we’re obsessed with getting back to zero at the end of the casino day or at the end of a race track day, a lot of the mental accounting probably has to do with kind of perception, space, and time—and a feeling of change and closure. So if I was doing an experiment or giving advice, I would say, for example, if you go to the casino and you’re behind $80, and you feel this itch to gamble more and more to get back to zero, just press pause. All right?

So you could even, in principle, program something in to say a device, or you have a friend of yours who says, “Look, you’re down $100. Let’s go have a drink.” A drink may help or it may hurt. I don’t know. We’ll have to do some more research on that. And I have a feeling a pause in time or even in space, right? Like if you’re at the race track and you’re standing in one part watching the races, and then you go to another part of the track and you get something to eat, that may actually kind of close the mental account and that may reduce the breakeven effect, the desire to break even …

Katy Milkman: Are you suggesting a fresh-start effect?

Colin Camerer: Exactly, yeah. Yeah. Some scientists have called this a fresh-start effect. Exactly, it’s essentially a homemade reset, or fresh start.

Katy Milkman: Colin, thank you so much for joining. This was really interesting.

Colin Camerer: It was my pleasure.

Katy Milkman: If you didn’t get our little joke about the fresh-start effect, check out our “Clean Slate” episode of Choiceology from January of 2019 on how differently we behave when we feel like we have a fresh start or a clean slate. I also want to take a minute to explicitly state that we’re not condoning gambling. But this technique Colin suggested is an interesting way to limit your appetite to take bigger risks than you usually would. Taking risks is OK if you understand the risks you’re taking and have thoroughly thought through their consequences. But accumulating losses can make us more risk-tolerant than we would usually be in a calm, cool, and collected state, which is where the problem lies.

Colin Camerer is the Robert Kirby Professor of Behavioral Finance and Economics at the California Institute of Technology, where he teaches cognitive psychology and economics. I’ve posted a link in the show notes and at to his paper “Prospect Theory in the Wild: Evidence From the Field.”

During bouts of stock market volatility, regular investors often wonder whether they should take a more active role in managing their portfolios. And while there’s no right answer for everyone, each trade decision is an opportunity to fall prey to a bias and court more risk than you’re actually comfortable with. Check out the “Should You Be More Active With Your Portfolio” episode of our sister podcast, Financial Decoder. It might help you guard against the psychological traps that are present on either path. You can find it at, or wherever you listen to podcasts.

We touched on several important aspects of Prospect Theory on this and past episodes of Choiceology. We’ve covered research showing that losses loom larger than gains. And in this episode, we focused on the reflection effect, or people’s tendency to be risk seeking in the domain of losses but risk averse in the domain of gains. Both of these tendencies can lead us to flip-flop when making similar choices under trivially different circumstances. So how should you set yourself up to make the choices that really suit your risk tolerance?

As Danny Kahneman mentioned, the way any choice is framed can have a meaningful impact on what you decide—for better or for worse. Sometimes, you feel like you’re facing a loss, like Luis Green did, but haven’t actually lost anything. Luis didn’t really lose a million dollars, even if he felt like he did. Unfortunately, that perceived loss influenced his choice to gamble. Instead of thinking about a sure gain of $333,000, he felt like he was locking in a sure loss of $667,000, and that made all the difference in the world. In this case, his focus on loss was not a great strategy. If Luis had been able to frame his stint on Deal or No Deal as a gain no matter what, he might have had an easier time quitting and walking away with a sizeable amount of money.

A glass that’s half empty is also a glass that’s half full. A hamburger that’s 75% fat free is also 25% fat. Anti-virus software that has a 90% success rate also has a 10% failure rate. Interrogating your choices to see if there’s a way to reframe them is a great exercise, particularly for important decisions like what medical treatment to pursue, what insurance to buy for your home, and what stocks to sell in your portfolio when you need liquidity.

Colin Camerer’s suggestion to press the proverbial pause button on your decision, to give your brain a fresh start, may help you avoid risk seeking when that’s not really the strategy that’s right for you, but just the one that feels right because you’re fixated on what you stand to lose. Finally, just knowing that you may be tempted by riskier options when you’re in a loss position might give you the insight to question whether a gamble is really better than a sure thing.

You’ve been listening to Choiceology, an original podcast from Charles Schwab. If you’ve enjoyed the show, we’d be grateful if you’d leave us a review on Apple Podcasts so other fans can find the show too. And you can subscribe for free in your favorite podcasting apps—that way, you won’t miss an episode. Next time, we’ll look at a bias that clouds the way we view the success of entrepreneurs, musical acts, stocks, parenting techniques, and much, much more. I’m Katy Milkman. Talk to you next time.

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