It’s a familiar story: you lose a bet, and an almost irresistible urge tells you to place another, larger bet to win your money back. This behavior, known as "chasing losses," is one of the most dangerous traps in gambling and investing.
But why do we do it, even when we know it's illogical? The answer lies in cognitive biases.
The Sunk Cost Fallacy
The primary driver is the Sunk Cost Fallacy. This is our tendency to continue an endeavor once an investment in money, effort, or time has been made. The money you've already lost is "sunk" – it's gone, regardless of what you do next.
However, our brains don't see it that way. We feel that if we just invest a little more, we can "recover" the initial investment, failing to recognize that the new bet is a completely independent event with its own risk.
The Gambler's Fallacy
This is the mistaken belief that if something happens more frequently than normal during a given period, it will happen less frequently in the future (or vice versa).
For example, if a roulette wheel lands on black five times in a row, many people feel that red is "due." In reality, the probability for red or black is the same on every single spin. This fallacy encourages chasing because you feel your luck is "bound to turn."
How to Avoid Chasing Losses
- Set a Strict Budget: Before you even start, decide the maximum amount you are willing to lose and stick to it. This is your "stop-loss."
- Understand Variance: In any game of chance, there will be winning and losing streaks. A loss doesn't mean you are "due" for a win.
- Take Breaks: If you suffer a significant loss, step away. A clear mind makes better decisions.
- View Each Bet Independently: The outcome of your last bet has zero influence on the outcome of your next one. Treat every decision as a fresh start.