Moral of the story:
It’s not “house money”…it’s your money (if you take it!)
A man and his wife go to Las Vegas on their honeymoon. Over the first two days, they have lost their pre-determined limit of $1000 dollars…except for one 5-dollar chip. That night the husband wakes up at 3 am and sees a beam of light from under the door illuminating that single $5 chip.
The man thinks this must be an omen. So, he springs out of bed, grabs the chip, and runs down to the casino floor. He was in such a hurry, that he doesn’t even change out of his green bathrobe. Running to the nearest roulette table and puts his chip on the red three, which promptly hit and paid 35-1 on his $5 ($175). He said, “let it ride” and the wheel hit “3 red” again, giving him with $6,125.
At this point, the man thought he couldn’t lose and let the money ride again. After two more wins, he had accumulated $7.5 million. However, the pit boss was frantic and told him that the casino would not take any more of his bets, because the small hotel could not afford that payout if he were to win again.
The husband cashed out his chips and with security guards in tow, ran to the bigger casino down the strip. As soon as he arrived, he threw all the money on Red Three again and told the dealer to spin the wheel. Once again, his number came up. Ecstatic, the man decided to “let the $262.5 million ride one more time.” After a discussion between the pit boss and casino manager, they decided to take that bet and the dealer let the wheel spin. This time the wheel came up “Black 22” and the man had lost it all.
The husband left the casino and walked the mile back to his hotel room where he met his wife who was just waking up. She asked, “Where have you been?” The man replied that “I got up early and have been playing roulette.” His wife then responded, “How did you do?” The man casually replies “Not bad, I lost 5 bucks.”
This story illustrates the concept of “mental accounting”. Mental accounting is a tendency to value some dollars less than others…letting you waste money.
For example, a person who paid $10 for a ticket to a movie is less likely to pay for another ticket if he or she loses it than a person who loses $10 on their way to purchase a movie ticket is to cough up an additional $10 to buy the ticket.
Why is this the case you might ask? It is because you assign a value of $20 to the movie ticket in one scenario, whereas you write off the first $10 and assign a $10 cost to the ticket in the second scenario. This is another example of mental accounting and the biases that can be attributed to it, depending on which accounts money is taken from or going to.
In our case as traders, “house money” is our money…but only if we take (at least some) profits off the table.