The Gambler's Gamble

A gambler usually wagers more after taking a loss, in the misguided
belief that a run of bad luck increases the probability of a win. We tend
to cling to the misconception that past events can skew future odds. "On
some level, you're thinking, 'If I just lost, it's going to even out.'
The extent to which you're disturbed by a loss seems to go along with
risky behavior," says University of Michigan psychologist William
Gehring, Ph.D., co-author of a study linking dicey decision-making to
neurological activity originating in the medial frontal cortex, long
thought to be an area of the brain used in error detection.

Because people are so driven to up the ante after a loss, Gehring
believes that the medial frontal cortex unconsciously influences future
decisions based on the impact of the loss, in addition to registering the
loss itself.

Gehring drew this conclusion by asking 12 subjects fitted with
electrode caps to choose either the number 5 or 25, with the larger
number representing the riskier bet. On any given round, both numbers
could amount to a loss, both could amount to a gain or the results could
split, one number signifying a loss, the other a gain.

The medial frontal cortex responded to the outcome of a gamble
within a quarter of a second, registering sharp electrical impulses only
after a loss. Gehring points out that if the medial frontal cortex simply
detected errors it would have reacted after participants chose the lesser
of two possible gains. In other words, choosing "5" during a round in
which both numbers paid off and betting on "25" would have yielded a
larger profit.

After the study appeared in Science, Gehring received several
e-mails from stock traders likening the "gambler's fallacy" to impulsive
trading decisions made directly after off-loading a losing security.
Researchers speculate that such risky, split-second decision-making could
extend to fighter pilots, firemen and policemen—professions in which
rapid-fire decisions are crucial and frequent.