Pay or Pledge: Winning in Gambling

Danqi (Keiki) Wei

This blog is based on the prize-winning essay by Keiki Wei, for the LSE course in Behavioural Public Policy (2020)

Gambling businesses have always been able to identify and exploit heuristics in human decision-making – the quick “rules of thumb” that we use to help us make choices when faced with risk and uncertainty over outcomes (Tversky & Kahneman, 1992, p.317). Problems associated with this commercial exploitation of our cognitive short-cuts are particularly evident in the context of online gambling. For example, the utilisation of positive audio and visual messages during “near-miss” outcomes in slot games, create the false illusion of a close win even though a loss is still a real loss no matter how close to a win it falls (Dixon et al., 2010). These “dark nudges” appear to be successful in fuelling gambling behaviour, through their appeal to emotive heuristics, closing down opportunities for cold rational thought (Newall, 2019, p.66).

Understanding Gambling Behaviour 

According to cumulative prospect theory, we frame our decisions as “gains” and “losses” around a subjective “reference point” (Kahneman, 2012, p.282). In the context of gambling this reference point is usually the initial monetary amount upon entry to the game. Gamblers are also likely to generate an overall positive picture of winning and hence overestimate the probability of significant profits despite having knowledge that “the house always wins” (Camerer, 2002, p.297). Before the beginning of the session, individuals also typically believe that they possess sufficient rational self-control to stop if there are too many losses, and to continue only if they win (Barberis, 2012, p.41). 

In contrast to this, however, time inconsistency in these preferences kicks in. As the gambler accumulates wins and losses, their assessment of the probability of winning shifts. Thus, their pre-determined strategy also flips, notably endorsing the decision to continue gambling after a run of continuous losses (or to stop after a series of wins) (Barberis, 2012, p36). The key to turning this dangerous situation around may be to improve the participant’s awareness of their time inconsistency.

Asymmetric Paternalism and Commitment Contracts  

An effective intervention to achieve this awareness may require an approach rooted in  “asymmetric paternalism”. Interventions consistent with the principles of asymmetric paternalism should be relatively harmless to rational players whilst benefiting the irrational (Camerer et al., 2003, p.1212), who find themselves behaving in ways that are inconsistent with their own intentions. This approach leads us to propose a policy intervention using a commitment contract. This is a self-determined device that allows individuals to constrain their future selves through the use of self-imposed boundaries and penalties (Ladouceur et. al., 2012, p.216).

Pay or Pledge

Upon entering the gambling site, the gambler is presented with a choice between paying a mandatory entry levy or making their own behavioural pledge to themselves – a commitment contract between their present and future self. Upon selecting the option of the commitment contract, and thereby avoiding the entry fee, the player would pledge a spending limit and pay a returnable deposit. If they then place a wager that would mean exceeding their pledged spending limit, a message would appear asking for confirmation of this change, reminding them of their recent pledge and the loss of their deposit. If they stay consistent with their original intentions, then the deposit will be returned to them when they leave the game. 

The reminder of their intentions and the potential loss may push back against present bias in repeated gambles, where individuals make impulsive decisions for instant gratification (O’Donoghue & Rabin, 1999, p.103). The effectiveness of these reminders on gambling behaviour is evident in the Auer et al. (2018) study which showed that personalised reminders did lead to a reduction in the amount gambled. 

Asymmetric Paternalism?

Camerer et al. (2003) set out two fundamental yardsticks to evaluate asymmetric paternalism in the context of behavioural policies. Firstly, the implementation costs must be considered together with the low costs imposed on rational gamblers (Camerer et al., 2003, p.1219). Secondly, even though the firm may suffer due to the policy, there must be an overall net benefit (Camerer et al., 2003, p.1220). 

In this case, it is envisioned that the policy would be implemented alongside current gambling regulation. For example, in Norway, there are several existing limit-setting tools which include bet and deposit limit options (Auer et al., 2018 p. 1056). The addition of the explicit commitment contract feature to existing tools in the Norwegian context will most likely be minimal. Furthermore, the deposit and the levy should be kept as relatively small sums. The cost imposed on rational gamblers will not be burdensome given their awareness of the time inconsistency. Although firms might incur some revenue reduction, since they ordinarily profit from irrational gambling behaviour, the social benefits from responsible gambling would outweigh those losses over time (Camerer et al., 2003, p.1221) given the scale of gambling harms in many countries.

However, in order for the policy to be efficacious and cost-effective, it would require active co-operation from gambling businesses given the diversity of the sector and the complexity of regulating an adaptive “moving target” (Weiss-Cohen et al., 2018). The opportunities for firms to frame the options in ways that minimise their impact could be significant in the absence of very detailed and ongoing regulation. Experimentation with these policies would provide opportunities for new research into irrational gambling and the effectiveness of interventions for irrational gambling that are based on support for self-determination and self-control.

A win-win between enjoyment and harm reduction?

Gambling enjoys increasing popularity and online options have made this form of entertainment increasingly accessible. The application of policies based on the principles of asymmetric paternalism could provide a much fairer experience for gamblers within this modern context of easy 24/7 access. Well-designed policies to tackle gambling harms should deliver a win-win, of boosting enjoyment whilst blocking harm.  

An approach that uses a commitment contract may be well suited to this purpose, supporting players’ self-determination in sticking to their own good intentions and overcoming the risks of inconsistency with their own wishes. The “levy or deposit” decision itself becomes a game within the game.