Folk Economics: Punting is not a zero-sum game

In his latest Psychology of Betting article, Jack Houghton discusses Folk Economics and how to improve the mental side of your punting.

You can watch our four part interview with Jack on all things Betting Psychology on the Betfair Hub.


Introduction

Nowadays, most literary types consider Shakespeare’s Merchant of Venice to be most interesting for what it has to say about antisemitism. To me, though, they miss the point.

The treatment of the Jewish moneylender, Shylock, may sit uncomfortably with post-holocaust audiences and therefore absorb their attention, and Shylock’s “Hath not a Jew eyes?” speech certainly provides a stirring rebuttal of prejudice, but, to me, the central theme of the play is economics, not race.

The clue is in the title. Venice, during Shakespeare’s life, was the centre of a new world of mercantilism, which had seen people move from agrarian societies where every transaction was personal – “I’ll trade you six eggs for a bag of carrots” – to societies where transactions were more complex, involving multiple actors.

When a Venetian bought a silk scarf in 1596, they by then had no understanding of the intricate chain of transactions that had led to it hanging around their neck. Which is why Antonio, the merchant previewed in the play’s title, begins by telling audiences that he is sad, although he’s not quite sure why.


What is Folk Economics

As the play progresses, the audience learns why: he has ships, financed through credit, in all four corners of the globe, and it is the financial complexity of his life that is causing his world-weariness. Shakespeare was writing in a London that was undergoing a similar transformation to Venice – it was becoming a centre of world trade underpinned by the money lending Elizabeth I had made legal 25 years earlier – and, to my mind, wrote the play to explore this.

Which is why a 2017 paper by Bang Petersen and Boyer made for familiar reading. They argue that humans, who evolved in co-operative communities where trade was direct and between those familiar to each other, are cognitively unsuited to the vast-scale economics of the modern world, leading to misguided beliefs about financial transactions. They term these folk economics.

These beliefs, like all the cognitive biases explored in these articles, are evolutionary hardwired, so as much as we might try to shift them, we won’t be able to. Our best hope is instead to constantly remind ourselves of what they are, and check our decision making for evidence of their infiltration.


The concept

Take the concept of the zero-sum game, considered by Bang Petersen and Boyer a central plank of folk-economics thinking. In small, co-operative societies, one person’s gain was another’s loss, and when someone is seen to profit, therefore, we tend to instinctively view this as unfair.

Unfortunately, this simplistic thinking does not always suit more complex financial systems, where it is possible for everyone to gain in cases where overall wealth is increasing. Try this thought experiment to see how it works. I will give you information about a man and you should track your emotional response to him:

He is an online retail billionaire.
He has 600,000 workers.
Most of his employees work in warehousing and delivery.

Now, it is likely that upon starting to read the word “billionaire”, you already began to form a negative view of this man. It is hard not to: our brains are primed to believe that any wealth must come at someone else’s expense. The reality is far more complex. It is likely that millions of customers benefit from cheaper goods, delivered more quickly, because of this entrepreneur; and that many workers, who wouldn’t otherwise have a job, also benefit.

The taxes collected from him, his company, and his workers, benefit society more generally, too. In other words, it could easily be the case that without this entrepreneur, everyone would have been worse off, and yet our folk-economics riddled brains write him off before we even know his name; we just assume he is rich because he’s made someone else poor.

The dangers of this zero-sum thinking are seen, all-too-often, in the way punters think about Betfair markets. Far too many personalise the bets they place, believing there to be another individual on the other end of them. A winning bet, therefore, is a moment of conquest involving feelings of superiority; whereas a losing bet is a moment of theft, where we feel we have been wronged.


The key problems

There are three key problems with these thought patterns. First, conceiving a bet as a head-to-head encounter in this way is probably inaccurate. It is likely that most bets placed involve multiple actors within a market whose money is aggregated to meet your demand. It is also likely that some of those who you bet against will have other bets in the same market, meaning that whilst your bet may lose, they might not necessarily profit in that instance either.

Second, and more importantly, this kind of thinking encodes a short-termist view of punting which will lead to unprofitability. Winning in the long-term is about identifying value: the instances where the odds available on a selection are different to its likely chance of occurring. However, just because a bet is value, it doesn’t mean it will win. Most won’t.

The aim is to develop systems of analysis which allow the accurate and consistent identification of value so that, over time, the infrequent wins will more than compensate for the more frequent losses. Conceiving a bet to be a one-on-one competition, then, makes it difficult to adopt this necessary long-term view: a loss becomes a dent to our pride, clouding our judgement of enduring value.

Third, and most crucially, it leads to an emotional response. Believing that a lost bet is the result of some dastardly criminal, who has metaphorically raided our grain store and stolen our food, makes it difficult to accept the losses that are a necessary part of long-term profitability. Instead we feel compelled to chase the loss, to avenge the injustice. It’s the emotional response that leads those with gambling addictions to bankrupt themselves in a single afternoon at the track.

The dishonorable on-course bookie (who happens to have taken thousands of bets – winning and losing – across what turned out to be an unprofitable afternoon) has wronged them and justice must be restored.


Conclusion

There is no way to rid ourselves of zero-sum thinking: our brains evolved when it provided the best way to think about economic transactions. Unfortunately for us, economics has changed significantly in the intervening years, whilst our brains have remained the same. It’s why Antonio stares wistfully out across the Venetian lagoon at the start of Merchant of Venice, remembering a simpler, agricultural life.

And it’s why we punters need to recognise that the complex financial world in which we live – both within Betfair markets and in our wider life – will constantly trigger a zero-sum-thinking-driven emotional response in our brains. Finding the ways to recognise when this is happening to you, and moderating your emotional response to these times, is crucial. Remember that a losing bet is not someone raiding your grain store; reacting like they have will make you unprofitable.


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