A new Cornell study of online poker seems counterintuitive: The more hands players win, the more likely they are to lose big in the end.
According to the study’s author, Cornell sociology doctoral student Kyle Siler, whose study analyzed 27 million online poker hands, is that the multiple wins are likely for small stakes, and the more you play, the more likely you will eventually be walloped by occasional — but significant — losses.
This finding, Siler said, “coincides with observations in behavioral economics that people overweigh their frequent small gains vis-à-vis occasional large losses, and vice versa.” In other words, players feel positively reinforced by their streak of wins but have difficulty fully understanding how their occasional large losses offset their gains.
The research was not solely about poker. It really also “speaks to how humans handle risk and uncertainty,” said Siler, whose look at online poker combines aspects of behavioral economics, economic sociology and social science theory. “Riskiness may be profitable, especially in higher-stakes games, but it also increases the variance and uncertainty in payoffs. Living one’s life, calibrating multiple strategies and managing a bankroll is particularly challenging when enduring wild and erratic swings in short-term luck and results.”
How does poker, one asks, apply to mediation and negotiation. It is really rather simple. Negotiations and litigation are very much like poker. Often you are dealt a set of cards; you can only change certain cards that you are dealt; you know some of the cards that the other side has, but not all; slowly more cards are revealed; as the game (or litigation) progresses the risks and costs get higher to stay in the game; your opponents can affect your risk strategy; and at the end once all cards are revealed, it still relies on luck, despite the best strategy.
In addition, understanding how people react to risk and rewards is very important to understanding how people will react to factors in negotiations. Yesterday, I mediated a case with a man who didn’t care at all about risk or reward. He played in the environment of black and white, right and wrong. He did not see gray, and didn’t care that grey existed. That person is completely different than others who do react to risk.
Further, this study addresses the issue that litigants may often overvalue the little wins that they achieve in litigation. They also have a tendency to overvalue their own position. In a recent case, a party stated that the judge had been ruling in their favor on many issues. As such, they devalued the risk of losing a motion for summary judgment. In mediation, they rejected a substantial settlement offer on the grounds that they would not lose summary judgment. The court granted the summary judgment. This anecdotal story is consistent with the study on poker: People overvalue the small wins and then can get clobbered by the big loss. Instead, people should really not factor the prior wins as strongly. Just as in poker, the fact that a person wins the last hand, has no bearing on whether he will win the next one.
Cornell University (2010, January 13). Online poker study: The more hands you win, the more money you lose. ScienceDaily. Retrieved January 13, 2010