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How to save £20, but lose £100,000

The simple way to lose out on £100,00, by saving £20, is quite simple: by not betting on Leicester City to win the Premier League last August. This is what happened to poor John Micklethwait. For decades he had bet £20 before each season that his team would win the league title. The worthless betting slips accumulated like so many broken dreams in his wallet.

But last year Micklethwait forgot to make his annual bet because he was in the middle of a move from London to New York to become editor-in-chief of Bloomberg News. The odds given by bookmakers on Leicester to win the title were 5,000-1. If he’d made his habitual flutter he would have won £100,000. Hence the massive “loss”.

Actually, this tale teaches us something about how we think about loss, risk and decisions in general. Objectively, Micklethwait saved himself £20, as he himself remarks at the conclusion of a Bloomberg article he wrote about his experience. But you sense he doesn’t really believe that to be true; nor do most other people.

Of course there is a lot of hindsight bias at work. If Leicester had not won the title in one of the most unlikely stories in sporting history, Micklethwait and the rest of us would probably not have much trouble describing the missed bet as a financial saving.

But there’s more to it. It was the pattern of behaviour prior to the failure to spend that’s significant. Diverting from an established pattern of behaviour is psychologically important for us as individuals – and also in the way others evaluate our actions.

Nobel laureate in economics, Daniel Kahneman, once got some subjects to evaluate two scenarios.

1: Mr Brown almost never picks up hitchhikers. Yesterday he gave a man a ride and was robbed.

2: Mr Smith frequently picks up hitchhikers. Yesterday he gave a man a ride and was robbed.

He asked the subjects which of the two men would feel the greater sense of personal regret. 88% said Mr Brown, 12% Mr Smith. Some other subjects were asked a different question: which of the two men will be more severely criticised? Here the results were almost reversed. 23% said Mr Brown and 77% said Mr Smith. Quite a divergence given the two men did precisely the same thing: picked up a hitchhiker.

But the context is what matters. Deviating from a norm leads to regret – especially if things go wrong. And a pattern of behaviour is also regarded through a moral prism, much more so than an individual act. As Kahneman puts it: “Regret and blame are both evoked by comparison to a norm”.

Micklethwait will be kicking himself because he broke from his norm. Which, of course, is somewhat bizarre because a £20 bet on a 1-5,000 chance does not make any economic sense.

Kahneman suggests this regret/blame effect is the reason investors sometimes hang on to stocks long after it makes sense to sell them, why consumers sometimes waste money on expensive branded drugs rather than switching to cheaper generics and why many of us stick stubbornly to the status quo in many areas of our lives.

Perhaps this explains why people get locked into spending money on lotteries, especially if they choose the same “lucky” numbers every week. Imagine the flood of regret and anguish felt if those lucky numbers came up and we hadn’t bought a ticket. That could explain why people carry on betting in lotteries and their traditionally hopeless football teams.

But why do they do it in the first place?  There’s the thrill of hope the bet purchases of course. But psychologists have another explanation too: the possibility effect.

What’s more exciting? A change in the odds of winning a £1m prize from 0 per cent to 1 per cent, or a change in the odds from 4 per cent to 5 per cent? Studies suggest most people are more enthused by the former shift – even though the absolute size of the change is identical.

A very small possibility of a good outcome – such as winning the lottery or 1-in-5,000 odds of your team winning the Premier League – can be a powerful incentive. The possibility effect is reckoned to be the reason many people mentally “overweigh” the odds of unlikely desirable events.

In the film Dumb and Dumber, Jim Carrey’s character is informed by the object of his affections that his chances of getting together with her are “one in a million”. After receiving this terrible news the hero’s rubbery countenance contorts and his world has fallen apart. But suddenly his face brightens and he gurns: “So you’re telling me there’s a chance.” It’s funny because it’s true and despite the fact Jim Carrey was involved. And for Leicester, it really was true.

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