Risky Business: Kill, Eat, Sex and being Jagger

How to win at the casino and break the bank. You are probably too young to remember the story of a Chicago teenager whom..

How to win at the casino and break the bank. You are probably too young to remember the story of a Chicago teenager whom is looking for fun at home while his parents are away, but the situation quickly gets out of hand. Not a Facebook party, but Tom Cruise in the 1983 classic Risky Business. The film is actually a good metaphor for why we accept risk and how our brains make risky business decisions. At your primitive brain's core, is a embedded programme asking, will I

KILL IT or KILL ME
EAT IT or EAT ME
SEX WITH IT or SEX WITH ME?

It seems taking risks may be less an act of dangerous thrill seeking and more a product of lacking self control and brain theory. The teenage brain is wired to make risky decisions. Before the last time you took a risk, you probably didn't think the action was all that risky. It's not because you were being an idiot (although some risk taking certainly is), it's because your brain is connected and programmed to downplay risk. It thrives on reward and down plays risk as an evolutionary weapon for survival.

Let’s go to the Casino; come on, I feel lucky. I am on a winning streak.I feel like Jagger! (He is the hero of this story). The emotional response of feeling a winner, is known as thegambler's fallacy. It is the mistaken belief there is a balance in the world that makes things happen. That if something happens more frequently than normal, then it will happen less frequently in the future, or that if something happens less frequently than normal during some period, then it will happen more frequently in the future ( the very worrying belief in the Universe and balancing nature). In situations where what is being observed is truly random (i.e. independent trials of a random process), this belief, though appealing to the human mind, is false.

Here is one reason why. While modern technology means that roulette wheels are unbiased, less developed technology in the 1800’s, meant that it was possible to achieved the statistically impossible and guarantee you win at casino. Joseph Jagger was the man from Bradford who broke the bank at Monte Carlo and went down in history as someone who outsmarted a roulette wheel and brought a casino to its knees.

His background in mechanics led him to question the inner workings of a roulette wheel, and he began speculating as to whether the result was always 100 per cent random or whether it would be possible to predict on occasion. In 1873 Jagger invested in his theory by hiring six clerks to clandestinely monitor the outcomes of the six roulette wheels at the Beaux Arts Casino in Monte Carlo. The findings of Jagger’s investigations showed that, while the results of five of the wheels were completely random, the sixth wheel was showing a bias due to a mechanical imbalance. Once in possession of the number sequences, Jagger studied them intently and was able to come up with a pattern that would allow him to predict the outcome on that particular wheel.  Armed with this information, Jagger headed out to Monte Carlo to make his fortune in 1875, quickly winning a large sum of £ 14,000 (equivalent to £ 700,000 ). Within three days, however, Jagger’s pot of winnings is said to have grown to £ 60,000 (around three million pounds). Of course, the casino was watching Jagger like a hawk, and responded to his wins by rearranging the wheels. Jagger quickly made huge losses, before realising that a scratch he had noted on the faulty wheel was no longer present. This alerted him to the fact that he was no longer playing on his preferred wheel and he was able to then locate it in the casino and continue winning. Not to be beaten, however, the casino changed tack and started moving the frets (the metal dividers between the numbers) around daily, leaving Jagger unable to predict where the ball would land and putting him on a losing streak once more. Jagger left Monte Carlo and returned back to Halifax £65,000 (£3,250,000) richer. He broke the bank.

In hindsight, many risks like going to the casino feeling lucky, might seem obvious. When we do take the time to evaluate potential risks, there is often not much that is profound about them. Yet so many of us fall prey to unforeseen risks, believing that they came out of nowhere or that they could not have been anticipated. . In a studypublished in the journal Proceedings of the National Academy of Sciences, researchers from the University of Texas at Austin, UCLA, and others have shown that adrenaline junkies may be less motivated by the rush of danger than by an innate deficiency in willpower. Not only for adrenalin junkies and those that gamble. but for you in business. Is the brain hard wired to assess risk properly?

Well scientists still don't agree on all the areas of the brain that are involved in risk assessment, but there is some agreement about a cascade mechanism and sequence of evaluation of risk. Here is the chief suspects for this chain reaction (think TANVI). The Thalamus takes the first role in checking out the risk and absorbing the data. It is looking for the essentials first (Can I Kill it / Kill me; can I Eat it / Eat me; can I have Sex with it / Sex with me) and transfers this information to theAmygdala. Within a few milliseconds the amygdala makes a decision. It is super rapid and does not require slow thinking, processing or your higher, more evolved brain. This feels so right and some people call it a ‘gut feeling’. It will be red! I feel lucky. Well it certainly primal in origins but at the heart of the gambler’s fallacy. Now it is passed to the higher Neo-Cortex some 25 milliseconds after you saw the original problem. It uses reason, experience and processes a set of solutions. Which other parts of the brain can deal with. This goes to the Ventral Striatum which makes things happen (particularly in risk takers).The last brain area to field the problem is the Insula. This mediates the responses (turns down the risk acceptance mode) and stops you putting it all on Red.

Not all risk-taking is created equal, of course. The planned acts of opening a business, starting a company or accepting a new job are calculated risks, but they are necessary (essential for success).We are constantly tasked with handling these sorts of risks when they’re thrust upon us, but also when we actively seek them out, such as when we go skydiving or make the decision to walk into the casino.

So how does the brain deal with problem of risk? Your brain wants data and craves more and more. It starts to make decisions and fills in the gaps. We are probably hard wired for this problem and it is beautiful described in Jim Collins book (Great by Choice ) as Fire Bullets then Cannonballs. It is a form of future aversion, well know to parents of teenagers. Think Risky Business. This is the problem of assuming that because the future is unknown it cannot be tested. As a result, when faced with decisions about the future, we may rely solely on present data rather than trying to assess and test the unknown. To avoid falling into this trap, especially with the business landscape changing as often as it does, we have to become less averse to acting without data. Taking small steps to test out ideas may be better than the most pristine thought process beforehand.

But there is major problem for those that like risk and gamblers fall into this trap, because reward obscures risk. When things are going well, we tend to fly high and lose ourselves in the thrill of the reward. How do you avoid this problem? Routinely ask the simple question: What is my winning preventing me from seeing? If we did this, investors on a roll may register market conditions differently, and businesses experiencing huge successes from recent product releases would not be blind to the impending competition.

The brain is also looking for patterns and won't accept the mathematic truth of certainty and the science of probability. There is a rush of risk based emotions (hormones) that start to chase a loss. Why do we continue to throw good money after bad? And what is going on in our brains when we do this? Studies show that we may tend to avoid looking at our losses in life, and that some people are more averse to this than others. A recent study added that when we throw good money after bad, it is because the brain’s accountant does not contribute to financial decision-making as much as it usually does because prior investments prevent it from speaking up.

So what can you do to avoid making bad decisions? Start with the philosophy that it is not conditions that shape your destiny it is your deciisons. Work on the decision process to see risk and gamblers fallacy, which applies to investment and business.

The Gambler's fallacy arises out of a belief in a law of small numbers, andsometimes the God of Gaps. Sometimes it is the erroneous belief that small samples must be representative of the larger population. According to the fallacy you can have lucky streaks (think simple amygalda must eventually even out in order to be representative. Amos Tversky and Daniel Kahneman first proposed that the gambler's fallacy is a cognitive bias produced by a representativeness heuristic, (see my article on this brain pattern here). which states that people evaluate the probability of a certain event by assessing how similar it is to events they have experienced before, and how similar the events surrounding those two processes

The gambler's fallacy can also be attributed to the mistaken belief that gambling or picking winners is a fair process that can correct itself in the event of streaks, otherwise known as the just-world hypothesis. Other researchers believe that individuals with an internal locus of control. People who believe that the gambling outcomes are the result of their own skill, are more susceptible to the gambler's fallacy because they reject the idea that chance could overcome skill or talent.

I think it is a risky business gambling on your primitive brain. Have fun trying to predict where the roulette ball is going to land, but don’t expect to be able to ‘do it like Jagger’ as those days are definitely long gone.

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