Why do you bet less on a coin flip after winning big?
Information asymmetry
Why do you bet less on a coin flip after winning big?
Imagine you've just won a big lottery prize; naturally, you might feel more confident about your luck and less cautious in future bets.
Winning a large amount of money can make someone less careful, believing their luck is good. This is called moral hazard; it's when people take more risks because they're protected (like with insurance).
Example
If you usually bet 10 on a coin flip but now bet 50 because you won $100, that's moral hazard.
Remember this
Moral hazard can lead to riskier behavior because people feel protected, often resulting in inefficient outcomes.
Text adapted from Wikipedia, licensed under CC BY-SA 4.0.
Related concepts
Moral hazard
Moral hazard occurs when an economic actor takes on more risk because it won't bear the full costs
Adverse selection
Adverse selection occurs when one party has more information than the other
Endowment effect
People value owned items more than unowned ones
Prediction market
Why does betting on the future cost more to place than to take?
List of cognitive biases
Why do you choose a smaller reward now over a bigger one later?
Risk parity
Risk parity allocates based on risk contribution, not capital allocation
Educational content, not financial advice.
Swipe through 100 ML concepts daily
Open Pocket Polymath