When gambling was not injurious to health

The boyfriend was in a good mood. India had just beaten Pakistan and he had won a bet of Rs10,000.

“So what do you plan to do with the hard earned money?” I asked.

“Hmmm. I don’t know,” he replied.

“Buy me diamonds.”

“Diamonds for Rs10,000? You want fake diamonds?”

“Of course not. There is a nice earring that I have been eyeing for a while.”

“And how much does it cost?”
“Around Rs30,000.”

“Well, I am not falling for this.”

“Okay. Let’s play a game then.”

“Which game?” he asked.

“Let’s play teen patti, the game of cards,” I replied.

“Teen patti, now? It’s late in the night. And nowhere near Diwali, when the game is actually played.”

“Yeah. So you are afraid of losing?”

“Ah. Is that a challenge?”

“Of course it is.” |

And what happened after this was rather predictable. Not for the first time in history, a man was waylaid by a woman.

Well it started rather well for him. He kept winning and after a while was sitting on a cool pile of Rs30,000. I was of course down Rs30,000. And then he made the mistake he shouldn’t have made. He bet Rs30,000 on one round and that too blind.

As luck would have hit, my cards were better than his. So I won.

“What do you keep telling your clients about all day? Diversify your risk. Don’t put all your eggs in one basket.”

“Yes I do. But this is a different situation,” he said.

“How is it different?” I asked.

“Well the Rs10,000, I started with, was won as a bet. The remaining money I won on top of that was money you lost.

So in the strictest sense of the term I did not really lose anything because I was basically playing with my winnings,” he explained.

“Dil bahlane ko ghalib khayal acha hai,” I said rather poetically. “In reality you have lost Rs30,000.”

“Oh no. I haven’t.”

“You have my dear. And on top of that you have become a victim of what behavioural economists (economists, who link human psychology to economics) call ‘mental accounting’.”

“Mental accounting? What is that? You think you can use these fancy terms and get away with it.”

“Darling. Don’t get into your MCP mode. Hold on, let me explain. Richard Thaller, a pioneer in the field of behavioural economics and the economist who coined the term mental accounting, defines it as “the inclination to categorise and treat money differently depending on where it comes from, where it is kept and how it is spent.”

“Oh. That’s interesting.”

“In your particular case, this has led to what is referred as the gambler’s fallacy, the tendency of gamblers who lose their winnings, feeling that they haven’t lost anything at all.”

“Yup, that I understood,” he said, conceding defeat. “But does mental accounting apply in other situations as well?”

“Oh, sure it does. Gambling is not the only situation in which we human beings categorise money in different ways. As John Allen Paulos writes in A Mathematician Plays the Stock Market, “People who lose a $100 ticket on the way to a concert, for example, are less likely to buy a new one than people who lose $100 in cash on their way to buy the ticket. Even though amounts are the same in the two scenarios, people in the former one tend to think $200 is too large an expenditure from their entertainment account and so don’t buy a new ticket, while people in the latter tend to assign $100 to their entertainment account and $100 to their “unfortunate loss” account and buy the ticket.””

“Now that has happened to me. You remember the last time we went to watch a movie and on our way to the theatre I realised that I had lost the tickets we had booked in advance and I was very reluctant to buy new ones? You wouldn’t listen to me and bought new tickets.”

“Yup. And this tendency to categorise money in different ways leads to some very interesting situations when money comes in unexpectedly in the form of a tax refund, a salary arrear, a higher than expected bonus at the end of the year, or a generous cash gift from a visiting relative for that matter. Such money gets spent faster.”

“Yes. I can relate to that totally. The day I got my income tax refund last year, we went on a drinking binge. You remember that?” he asked.

“Of course I do. That is the only time you bought me champagne.”

“Hah.”

“As Gary Belsky and Thomas Gilovich point out in their book, Why Smart People Make Big Money Mistakes and How to Correct Them,  “Consider tax refunds, for example. Many people categorise such payments from the government as found money — and spend it accordingly — even though a refund is nothing more than a deferred payment of salary. Forced savings, if you will. If, on the other hand, those same people had taken that money out of their paycheck during the course of the previous year …they would most likely think long and hard before spending it on a new suit or jacuzzi.””

“So are we done yet?”

“Hold on. You know shops and malls shouldn’t really be accepting money through credit or debit cards because they don’t get the full amount of the transaction. Around 2% of the purchase price goes to the banks.”

“But cards are now accepted everywhere. There sure must be an economic logic to it.”

“Of course there is. As Belsky and Gilovich point out, “In fact, credit cards…are almost by definition mental accounts, and dangerous ones at that. Credit card dollars are cheapened because there is seemingly no loss at the moment of the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.””

“So what they are essentially saying is that when people use cards to buy things the quantum of the purchase goes up.”

“Yes sir. You are right. And now let’s go out for a drink. India has beaten Pakistan. You are with me. And I have just won some good money from you,” I said. 

“Sure baby. And we will drink champagne. And you will pay using your credit card,” he said, having the last laugh.

The writer works in
the financial services industry
and can be reached at
chandniburman@yahoo.com.