The dangers of weighting probability from intuition!
It is actually a bad idea to bet on your favorite team. Numerous bettors around the world feel about the potential returns instead of measuring the value of their bet by its Expected Value.
If for example you want to rate the importance of the following increases in your chance to win $1 million there are few options:
-the first option is moving you from no chance of winning to having a chance even it is a small one (probability of 0.05), that move will ‘activate’ positive emotion into you and that feeling is known as possibility effect and that makes gamblers to overweight long shots.
-the second option is with less dramatic impressions and it maybe comes along with a bigger chance of winning, still the same mental buttons are not being pushed here.
-the third option is when the outcome moves to 100% certainty and that can produce inverse of the possibility effect and that is known as certainty effect and when it comes to EV calculations these kind of outcomes are usually underweighted in relation to their probability.
Many bettors will choose to bet on team A and not on team B because they believe that there is more likely occurrence and not from the calculation of superior value. Many studies discovered that the objective use of probability in assessing outcomes declines where subject matter evokes a vivid emotional representation of the outcome.
Many people have asked themselves ‘’what will I do if I ever win the lottery’’ and that is the perfect example of generating vivid fantasy of an unlikely outcome. Because of this it is a bad idea to bet on your favorite team just like we mentioned at the beginning of this article.
It is much easier to make Expected Value calculation when the bet is worded in clear terms and that can make the weighting closer to the match probability. Outright markets for example can be phrased as ‘Player A vs. the field’ or as a long list of participants that player A is included (Player A: 3.201, Player B: 9,454, Player C: 11.232, etc. By looking at the first option you can see that it offers the simplistic presentation of the task for player A and that can cause cognitive overweighting of his probability of success and in the second option (they can be the same probability) you can see that it is a little bit more daunting prospect because the opponents of the player A are listed and that can lead to underweighted assessment.
To misjudging probability, the focus is of a big importance. It can lead to underweighting of probability when there is perception without recourse to proper calculation.
How perception that is without recourse to proper calculation (as well as inability to visualize a rare event) can lead to underweighting of probability is being illustrated by infamous betting coup by two bettors back in 1991.
The odds of a hole-in-on for European Golf Tour event were roughly 2.25 and the pair calculated the odds after intensively analyzing the statistics. With this information they targeted independent bookmakers and they requested odds for hole-in-one to be recorded at televised golf tournaments. Since hole-in-one is a rare event, the bookmakers had little or no experience of one happening and that resulted with quotes ranging from 4.00 to 101.00. And that is a perfect example of underweighting a rare event.