In the long run: Biological versus economic rationality

Abstract

Eight computer simulations examined how long hypothetical gamblers could continue gambling without going broke in different games of chance. Gamblers began with a fixed amount of money and paid a fixed ante to play each game. Games had equal expected value but varied in their probability of winning and amount won. When the expected value was zero or positive, gamblers playing low ante, low-risk games (high chances of small wins) had longer runs than did gamblers playing high ante, high-risk games (low chances of big wins). When the expected value was negative, gamblers playing high-risk games had longer runs than gamblers playing low-risk games. The results extend Slobodkin and Rapoport’s concept of biological rationality and explain why people with limited wealth are wise to avoid risks in winning situations and take risks in losing situations, a central principle of prospect theory.