On a riverboat casino I once witnessed a 21 year old kid parlay a $25 buy-in into $1000 in less than an hour. As his chip pile grew so did his grin, and he insisted on high fiving me repeatedly. I was happy for him but I was hoping he would take his money and run. Instead, he tried to ride his luck even further – even increasing his wagers to $200, $300 a hand. He was playing with “house money” and he figured he had nothing to lose. However he did have something to lose and unfortunately the story had an all too familiar ending. He hit a bad run and gone was his $1000 grin.
This is a common phenomenon among gamblers. When they’re lucky enough to be up on a casino, rather than quitting while they’re ahead or keeping the size of their wagers at a modest level, they become loose in their play and they take on even more risk. There’s a disconnect between the perceived value of their gambling winnings and their actual value. But $1000 is a $1000, regardless of whether it’s casino chips or a paycheck.
In behavioral economics, the tendency to value some dollars less than others is called “mental accounting”. This concept was developed by Professor Richard Thaler of the University of Chicago. People tend to place gambling winnings in the category of “bonus” or “found” money. People are more likely to make frivolous or unnecesary purchases with their tax refund or gift money as opposed to income earned on the job.
What contributes to gamblers placing less value on house money is the use of casinos chips. The value of casino chips are cheapened in much the same way that credit card dollars are because there is seemingly no immediate loss of money. For some, credit cards and casino chips are like monopoly money. Shoppers are much more likely to spend beyond their budgets on credit card purchases as compared to cash purchases. When buyers fork over cash, the value of of their hard earned money hits home harder. In casinos it’s easier for gamblers to risk hundreds, even thousands of dollars when they’re pushing out chips instead of cash.
So the next time you’re fortunate enough to be winning at the blackjack tables, or receive a tax refund or bonus check, be sure to keep your mental accounting in proper perspective. If you don’t, it can be detrimental to your financial well being.