Why I’m Not Betting on Donald Trump or the Dodgers
Carey Morewedge writes in today’s New York Times Sunday Review that “[l]ogic strongly recommends” betting against your preferred candidate or your favorite sports team. He elaborates:
Consider that for most people, losing something hurts more than gaining that same thing feels good — a phenomenon known as loss aversion. Consider, too, that as losses and gains increase in size, each additional unit of loss or gain has a smaller impact on you — a phenomenon known as diminishing marginal utility. That is, $1,000 won’t feel as significant to you if it’s added to your satisfaction at Hillary’s Clinton’s victory than if it serves as some compensation for your disappointment in the event of Donald J. Trump’s win. For both these reasons, we generally prefer to minimize our potential losses than to maximize our potential gains. And if you bet that your side will lose, that’s precisely what you’ll be doing.
It’s an interesting argument, and yet I’m not about to place a bet on Donald Trump or the Dodgers — even though I’m hoping for Hillary Clinton to win the presidency and the Cubs to win the National League championship.
Logic does strongly recommend insuring against events like illness, disability, and unemployment — events that affect one’s marginal utility of income. An extra dollar is more valuable if one needs it to pay for life-saving medical treatment, or if one loses a job and needs the dollar to pay for basic living expenses. And so we buy insurance against these sorts of occurrences even though the cost of insurance is greater than the probability of loss times the payout in the event of loss.
But the same logic does not necessarily apply to presidential elections and sports outcomes. I have little reason to believe that my marginal utility of income will be higher if Donald Trump is elected President. If anything, I might expect my marginal utility of income to be lower because the marginal utility of income is diminishing and a Trump presidency would likely leave me with more after-tax income. (As Lily Batchelder shows, this calculus could be different if I were a parent — and in particular a single parent — with an income below the level of a law professor.) Perhaps one might argue that people of all incomes ought to buy Trump insurance because a President Trump would start a trade war that crashes the economy, which would indeed affect the marginal utility of income for low-income workers and law professors alike. The key point, though, is that I might perceive an outcome to be undesirable even if it has no effect on my marginal utility of income, in which case it is not obvious that I should be buying insurance against that event.
So too in the Cubs-Dodgers context. I want the Cubs to win, but that doesn’t mean an extra dollar would be any more useful to me if they don’t. If anything, my marginal utility of income might increase if the Cubs beat the Dodgers, because then I would want to buy World Series tickets and would derive great utility from watching a home game at Wrigley. Again, I want to insure against events that increase my marginal utility of income. And so I want to insure against events that make me poorer, but not necessarily against events that make me sadder.
Morewedge offers a different explanation for the fact that individuals generally don’t bet against their favorite candidate or favorite team: he posits that “people are reluctant to hedge because it feels disloyal.” And in a fascinating new paper, Morewedge and co-authors Simone Tang and Richard Larrick report evidence consistent with the disloyalty hypothesis. In one of their studies, 59% of Boston University hockey fans rejected a free hedge paying them $5 if BU lost.
This most certainly does seem illogical. If anyone wants to pay me $5 if the Cubs lose the National League Championship Series, I will gladly accept. But I won’t bet money against them, even after tonight’s loss — and that’s not just because betting against the Cubs is illegal in Illinois. (Then again, betting in favor of the Cubs is illegal too.)
