Jesse Livermore went long-form this weekend on the topic of behavioralist BJ Skinner. Skinner’s work built upon Pavlov’s conditioning experiments – the way an animal (or human) can be taught certain behaviors by the means of positive reinforcement.
One section of Jesse’s post looked at the irrational desire we’re hardwired with to gamble or speculate. This concept has immediate implications to the investing world. Skinner deduced that people don’t have to win very often in order to maintain the allure of speculation, they just have to win once in awhile to keep the fervor alive.
Contra Marx and Freud, Skinner gave the first intellectually respectable psychological answer to the question. Human beings gamble, and enjoy gambling, even though the activity is pointless and irrational, because they’ve been subjected to a specific schedule of reinforcement–a “variable” schedule, where the reward is not provided every time, but only every so often, leaving just enough “connection” between the behavior and the reward to forge a link between the two in the brain and psychology of the subject.
Skinner showed that in order for the pigeon to maintain the pecking and turning behaviors, it doesn’t need to get the reward every time that those behaviors occur. It just needs to get the reward every so often–that will be enough to keep the pigeon engaging in the behaviors on an ongoing basis. Skinner noted that the same was true about gamblers. Gamblers don’t need to win every time, they just need to win every so often. A grandiose victory–a jackpot–that occurs every so often is more than enough to imbue them with inspiring thoughts of winning, and an associated appetite to get in and play. It is the business of a casino to optimize the schedule at which gamblers win, so that they win just enough to sense that victory is within their reach, just enough to feel the associated thrill and excitement each time they turn the lever. An efficient casino operation will not afford gamblers any more victories than that–certainly not enough for them to actually make money on a net basis, which would represent the casino’s net loss.
I recommend finding some time to read the whole thing, it’s a fantastic post with lots of jumping off points for deep thoughts of your own.