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About Amit Varma

Amit Varma is a writer based in Mumbai. He worked in journalism for over a decade, and won the Bastiat Prize for Journalism in 2007. His bestselling novel, My Friend Sancho, was published in 2009. He is best known for his blog, India Uncut. His current project is a non-fiction book about the lack of personal and economic freedoms in post-Independence India.




Bastiat Prize 2007 Winner

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16 October, 2014

The Endowment Effect

This is the 27th installment of my fortnightly poker column in the Economic Times, Range Rover.

There’s something strange that happens to me quite frequently. A friend will ask me for advice on a hand, and I’ll dispassionately tell him what I think is the correct course of action, and the reasons why. For example, while playing PLO he calls a raise in a 3-way pot from the big blind with 9876ds, with spades and hearts, and the flop comes JT2 with two spades and a heart, for a wrap and flush draw. My friend, huffing and puffing with excitement, bets, the next guy repots, the third guy further repots all in. What is my friend to do? It’s an easy fold, I say, because while he has a universe of outs, none of them make him the nuts. With so much action, the likely range of hands he’s up against include higher wraps and flush draws (like AKQ9ds), as well as sets, and against this range he’s crushed like Yokozuna sat on him. ‘Easy fold, you shouldn’t shame yourself by even thinking about it,’ I say, all clear and rational. And yet, I have found that while I give sound advice as an uninvolved observer, I do some incredibly stupid things when I myself am in a hand, especially when it comes to not folding. It’s like Amit the Player and Amit the Poker Thinker are two separate people. Why is this so?

Part of the reason, of course, is that we’re human, and humans crave action and dopamine, and that makes us rationalise doing silly things. Also, our brains are wired in a way that makes us reluctant to fold a hand – any hand. To be specific, we suffer from what behavioural economists term ‘The Endowment Effect.’

The term, first coined by the economist Richard Thaler in 1980, refers to the phenomenon where we value something we own more than we would if we did not own it. For example, in a 1984 study by Jack Knetsch and JA Sinden, participants were randomly given either a lottery ticket or US$ 2. After a while, they were given the option to trade their ticket for the money or the other way around. Most of them refused the switch, having come to value their randomly allotted gift more than the alternative. A famous 1990 study by Daniel Kahneman, Knetsch and Thaler offered a similar demonstration. In Kahneman’s words: “Mugs were distributed randomly to half the participants. The Sellers had their mug in front of them, and the Buyers were invited to look at their neighbour’s mug: all indicated the price at which they would trade. […] The results were dramatic: the average selling price was about double the average buying price.”

You can see illustrations of this all around you. Ask anyone which car to buy and they’ll recommend the model they own. I suspect that many Apple fans who rave about iPhones and diss Android are displaying the Endowment Effect – besides rationalising and validating their own purchasing decisions, of course. (Vice versa also, though I use Android and it really is better.) I have seen it at the poker table when, after the cards are dealt, a player absent-mindedly reaches out for his neighbour’s cards. Nonononono, goes the neighbour, those are mine, thereby displaying an irrational attachment to them even though the distribution is random and he doesn’t even know what they are yet.

More commonly, you see the Endowment Effect in action when a player, to use an old cliché, ‘gets married to his hand’. The most common leak in the world of poker, by far, is that people don’t fold enough. This is understandable; we’re programmed not to let go. That is our endowment –  and we must fight it.

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For more of my poker columns, do check out the Range Rover archives.

Posted by Amit Varma in Essays and Op-Eds | Poker | Range Rover | Sport

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