Why Betting Should Be Made Illegal
Perspectives from Prospect Theory
“Losses loom larger than gains” – Kahnemann and Tversky (1979)
These are words from the now famous paper on the economic Utility Theory named prospect theory, which later would contribute to Daniel Kahnemann receiving the Nobel prize in 2002. With prospect theory, the utility functions (describing the psychological value humans gain/lose from change) were expanded to account for reference points (taking the economic position of humans into account in the calculation of utility). And, most importantly the non-linear behavior was introduced showcasing two important features that are true to human behaviour:
- The marginal utility decreases.
- Losses loom larger than gains.
It is one of the most accurate and advanced economic theories, and a lot of research is still being done on the topic.
Essentially, what this means is that in a zero-sum game like those played in casinos, where the pot of the winner is precisely equal to that of the losers. Two players playing a game will always yield a net loss in utility. That is, the amount of utility that the group has from playing the game is negative.
Consequently, and from the perspective of prospect theory, all zero-sum games should be banned.
Special cases (cracks) in the theory
However, due to the behavior of the utility curves in prospect theory, where one individual losing, e.g. 1000 and 10000, is almost equivalent in utility loss (assuming that their utility function plateaus in this region). A net gain in utility for a group is, in fact, feasible if the zero-sum game fittingly distributes the winnings. The strong assumptions here are that of what the fitting distribution then entails, as the complexity of identifying it likely is high.
Consequently, it is of high interest to design games where a single player loses and their loss is split to multiple other players as this seems to yield net gains in group utility.
Examples of such games are seen in many places in the gaming industry. Of these, the most famous (to my knowledge) is the snake game like gulper.io. Essentially asserting the famous Robin Hood line “taking from the rich and giving to the poor” into a game.
Note that this results in a net gain for the group utility. The loss does not have to come from an individual with a higher reference point than others. The loss just has to be high enough for the individual’s utility Loss to reach a plateau where marginal loss is very small.
Philosophical shortcomings of prospect theory
The thrill of risk that removes us from the daily mill is fully overlooked. People are not just irrational — we are not rational for a reason. We seek thrills for a reason, likely because the true utility function of humans gives value to risk just for the sake of it. Because without it, the utility of other things is lesser.
We climb mountains, and we skydive. We endure struggle and praise hardship both as a collective and as individuals – all of which are perfectly irrational – but which seem necessary to a meaningful life.
So, taking prospect theory to the extreme is likely not the best idea (like with anything) e.g. completely banning gambling. But it does, however, yield a certain set of insights into human behavior over other standing economic theories.
Thank you for diving into the most recent exploration on Math’s Edge. Your curiosity fuels my passion. If you found value in this piece, I invite you to discover more insights from our publication. With mathematics, you don’t just understand the world better — you gain a distinct advantage. Keep seeking that edge, and do explore our other stories.
