The Behavioural Economics of Melbourne Cup Day

You have spent hours hunting for the right frock, shoes, bag and hat. You've been primped, plucked and spray tanned, waxed and blow dried.  You have dieted, exercised and cleansed. You've been up since the early hours, battled traffic snarls and endless queues. And now here you are.  Standing in the car park which has been claimed by heels rather than wheels, crammed in amongst sweaty strangers, sipping sour bubbles and nibbling soggy sandwiches. Ahhh, Melbourne Cup Day...proof irrefutable that we are not entirely rational beings.

In celebration of the famous Melbourne Cup, let's take a sneaky peek at the behavioural economics at play.

Overconfidence bias: 
We can be too confident in our abilities which leads to risk taking.
"I've studied the form and of course I know more than the Bookies."  

Illusion of control: We think we can control events that we can't.
"My horse always/never wins."

Actor-observer bias: 
We attribute our own positive behaviour to our character, and the behaviour of others to the situation.
"When I get drunk it's the mix of wine and bubbles that did it; when you get drunk it's because you drank too much!" or "When I win it's because I am super talented in selecting winners; when you win it's luck."

Endowment effect: 
Don't get too excited guys, endowment is about us overvaluing what we own.
"Sure I randomly drew that horse out of the hat, but it's mine and you can't have it."

Restraint bias: 
We underestimate our ability to avoid temptation.
"It's ok, I'll only have a couple of drinks."  

Remembering self: 
Our memories of an experience rather than the experience itself is what persuades us.
I remember the fun of previous Cup days rather than the reality of sore feet, sun burn and expense.

Mental accounting: 
Money is allocated to different 'mental' bank accounts.
I paid for my outfit out of a different 'mental account' than my power bill. Any money I win will be 'free' money to be used on fun stuff.

Focusing illusion:
Whatever we focus on has more importance at that moment than any other time.
"What, there's a race after the Cup??"

Clustering illusion:
We see patterns where none exist.
"The jockey is wearing my lucky colours."

Hindsight bias:
We knew it all along.
"I knew it was going to win!  I just didn't get around to placing a bet."

Sunk cost fallacy:
Once resources have been invested, we find it hard to walk away.
"I better just finish this last drink. Can't let it go to waste" or "Of course I'll wear that fascinator again!"

Sounds like fun doesn't it?  And one for the road, 

Hedonic framing:
Separate, smaller gains over a stretch of time are more pleasurable than one large win of equal value, but smaller separate losses hurt more than a once off.  In other words, the more times we are interrupted by good or bad news, the better/worse it is.
"This is the best day of my life!" or...

No. Don't worry. Your horse always wins.  Have a good one.

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Image from http://www.rgbstock.com/images/horses/2