Economic Analysis of Blackjack: An Application of Prospect Theory∗

With prior gains, a stock trader becomes more risk-seeking until the gains are cancelled out by further losses. A losing hockey team tends to pull out the goalie in the final minute of the game even this increases the chance of losing more scores. The first example is called “house money effect ” and the second “break even effect”. These behaviours are conformable with the implications of prospect theory developed by Daniel Kahneman and Amos Tversky. These hypotheses are usually tested by behavioural economists under laboratory environments. On the contrary, we analyse the actual behaviours of blackjack players using data collected in a casino. Our results indicate that less than half of the gamblers follow the optimal strategies in the game. But they increase their effort when the wagers are higher. More interestingly, only a moderate fraction of the gamblers exhibits the house money effect and/or the break even effect. JEL Classification Code: D81