This article originally published in The Northern Daily Leader on 12 May 2012.
By the third day of their honeymoon in Las Vegas, the newlyweds had lost their $1,000 gambling allowance. That night in bed, the groom noticed a glowing object on the dresser. Looking closer, he realised it was a $5 chip they had saved as a souvenir. Strangely, the number 17 was flashing on the chip’s face. Taking this as an omen, he donned his green bathrobe and rushed down to the roulette tables, where he placed the $5 chip on the square marked 17. Sure enough, the ball hit 17 and the 35-1 bet paid $175. He let his winnings ride, and once again the little ball landed on 17, paying $6,125. And so it went, until the lucky groom was about to wager $7.5 million on the next spin. Unfortunately at that point the floor manager intervened, claiming that the casino didn’t have the money to pay should 17 hit again. Undaunted, the groom taxied to a better-financed casino downtown. Once again he bet it all on 17 — and once again it hit, paying more than $262 million. Ecstatic, he let his millions ride — only to lose it all when the ball fell on 18. Broke and dejected, the groom walked the several miles back to his hotel. “Where were you?” asked his bride as he entered their room. “Playing roulette”, he answered. “How did you do?” she asked. “Not too bad”, replied the groom, “I only lost five dollars”.
This story, known as the Legend of the Man in the Green Bathrobe, is most likely not true, but it certainly contains an element of truth. That’s because it very clearly illustrates a well-known principle of behavioural economics – the ‘house money’ effect. Research has shown that people take far more risks with money that they have won in a windfall or from gambling. It’s in the wiring of our brains that when gambling with earlier winnings from the casino, we make much riskier bets than usual, somehow rationalising that ‘it’s not really my money’. If the Man in the Green Bathrobe had worked hard over many years to save up $262 million, would he have been willing to gamble it all on one spin of the roulette table?
Unfortunately the ‘house money’ effect is not restricted to just when we’re at the track or the casino – it also affects how we approach our finances. Beware of treating windfalls or sudden gains differently from money which you earn through hard work. Treat every dollar the same, no matter how it comes to be yours. Except if you win money playing roulette in your bathrobe – spend a few dollars and buy yourself something nicer to wear.