gambler's fallacy

Syllable breakdown

Dictionary meaning

the erroneous belief that the probability of a random event is affected by previous outcomes of the same type of event — for example, believing that a series of heads in coin flips makes a tail more likely on the next flip, or that a roulette wheel is due for a certain number after a long absence; the gambler's fallacy arises from misapplication of the representativeness heuristic — the expectation that a short sequence of random events will look representative of the overall probability distribution — and from a misunderstanding of statistical independence; truly random events have no memory, and the probability of each outcome is unchanged by previous results; in financial markets the gambler's fallacy appears when investors believe a stock that has fallen for several days in a row is due for a bounce, or when lottery players pick numbers that haven't appeared recently; the hot hand fallacy — the belief that a series of successes makes a further success more likely — is the mirror image and can also affect financial decision-making

Examples

• The gambler's fallacy caused the roulette player to bet heavily on black after seven consecutive reds, believing the wheel was 'due' for black.
• An analyst exhibiting the gambler's fallacy predicted a market reversal after three consecutive down months, ignoring that monthly returns are largely independent.