CHAPTER 1 NOT ALL DOLLARS ARE CREATED EQUAL By the third day of their honeymoon in Las Vegas, the newlyweds had lost their $1,000 gambling allowance. That night in bed, the groom noticed a glowing object on the dresser. Upon closer inspection, he realized it was a $5 chip they had saved as a souvenir. Strangely, the number 17 was flashing on the chip's face. Taking this as an omen, he donned his green bathrobe and rushed down to the roulette tables, where he placed the $5 chip on the square marked 17. Sure enough, the ball hit 17 and the 35-1 bet paid $175. He let his winnings ride, and once again the little ball landed on 17, paying $6,125. And so it went, until the lucky groom was about to wager $7.
5 million. Unfortunately the floor manager intervened, claiming that the casino didn't have the money to pay should 17 hit again. Undaunted, the groom taxied to a better-financed casino downtown. Once again he bet it all on 17 -- and once again it hit, paying more than $262 million. Ecstatic, he let his millions ride -- only to lose it all when the ball fell on 18. Broke and dejected, the groom walked the several miles back to his hotel."Where were you?" asked his bride as he entered their room."Playing roulette.
""How did you do?""Not bad. I lost five dollars." This story -- told in some parts of Nevada as the gospel truth -- has the distinction of being the only roulette joke we know that deals with a bedrock principle of behavioral economics. Indeed, depending on whether or not you agree with our groom's accounting of his evening's adventure, you might have an inkling as to why we considered a different title for this chapter, something like "Why Casinos Always Make Money." The conventional answer to that question -- that casinos are consistently profitable because the odds for every game are stacked in favor of management -- does not tell the whole story. Another reason casinos always make money is that too many people think like our newlywed: because he started his evening with just $5, he felt his loss was limited to that amount.This view holds that his gambling spree winnings were somehow not real money -- or not his money, in any event -- and so his losses were not real losses. No matter that had the groom left the casino after his penultimate bet, he could have walked across the street and bought a brand-new Rolls-Royce for every behavioral economist in the country -- and had enough left over to remain a multimillionaire.
The happy salesman at the twenty-four-hour dealership -- this is a Vegas story, after all -- would never have thought to ask if the $262 million actually belonged to the groom. Of course it did. But the groom never really saw it that way. Like millions of amateur gamblers, he viewed his winnings as an entirely different kind of money and was therefore more willing to make extravagant bets with it. In casino-speak this is called playing with "house money." The tendency of most gamblers to fall prey to this illusion is why casinos would likely make out like bandits even if the odds were stacked less heavily in their favor.The "Legend of the Man in the Green Bathrobe" -- as the above tale is known -- illustrates a concept that behavioral economists call "mental accounting." This idea, developed and championed by the University of Chicago's Richard Thaler, underlies one of the most common and costly money mistakes -- the tendency to value some dollars less than others and thus to waste them.
More formally, mental accounting refers to the inclination to categorize and treat money differently depending on where it comes from, where it is kept, or how it is spent. To understand how natural, and tricky, this habit can be, consider the following pair of scenarios. Here, as in similar mental exercises you'll find sprinkled throughout this book, try as best as you can to answer each question as realistically as possible. The more ".