Grinding?

From Malcolm Gladwell, who retells an experiment documented in a book by Kahneman and Tversky:

"...a group of people were told to imagine that they had $300. They were then given a choice between (a) receiving another $100 or (b) tossing a coin, where if they won they got $200 and if they lost they got nothing." (Note: by nothing, he means nothing additional. They don't lose any money by losing the coin flip, they just don't get any more than their $300.)

He continues:

"Most of us, it turns out, prefer (a) to (b). But then Kahneman and Tversky did a second experiment. They told people to imagine that they had $500 and then asked them if the would rather (c) give up $100 or (d) toss a coin and pay $200 if they lost and nothing at all if they won. Most of us now prefer (d) to (c)."

Why this example? I think it relates pretty well with a lot of the poker play I've witnessed in the past year or so. How many times have you seen people willing to gamble their entire stack from behind on some ugly draw and chalk a loss up to the cards but those same players missing a value bet when playing from in front. The rationale is that they are always just happy to take down a pot and win one, never minding that the win was modest.

It's a vital flaw in thinking, in my opinion, and one that can ultimately separate winning from losing long-term.

Get back to the choices above (a-d). Which side of each choice did you fall on? Think about why.

As Gladwell (and I assume Kahneman and Tversky) points out, "What is interesting about those four choices is that, from a probabilistic standpoint, they are identical. Nonetheless, we have strong preferences among them. Why? Because we're more willing to gamble when it comes to losses, but are risk averse when it comes to our gains."

It sounds familiar, no?