Gambler’s Fallacy — Are you a part of it?

If you lose bets more often than you win, you’ve likely fallen victim to the gambler’s fallacy—a major misconception so common among gamblers that it has even become a well-known phrase.

What Is the Gambler’s Fallacy?

The gambler’s fallacy, also known as the Monte Carlo fallacy, occurs when someone mistakenly believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events.

This way of thinking is flawed because past events do not alter the probability of future outcomes.

Recognizing the Fallacy

If a sequence of events is random and the events are independent from each other, then by definition the outcome of one or more events cannot influence or predict the outcome of the next event.

The gambler’s fallacy stems from a mistaken judgment about whether a sequence of events is truly random and independent. It leads to the false conclusion that the next outcome will somehow “balance out” the previous ones.

For example, imagine flipping a coin ten times and getting “heads” every time. Many people will insist that the next flip is more likely to land on “tails,” which is completely irrational.

It is obvious that coin flips are not systematically connected by any hidden mechanism, yet people who forget or fail to realize this fall victim to the gambler’s fallacy with their illogical predictions.

Examples of the Gambler Fallacy

The most famous case occurred in 1913 at the Monte Carlo Casino in Monaco, when the roulette ball landed on black several times in a row. Convinced that red was “due,” players began stacking chips on red. Red finally came—after 26 consecutive black spins. By then, millions had been lost.

The gamblers fallacy (or Monte Carlo fallacy) is a misunderstanding of probability and applies just as much to investing as it does to gambling.

Some investors sell off a position after it rises through a long streak of positive trading sessions. They do so because they mistakenly believe that after a series of consecutive gains, the position is now “more likely” to fall.

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How Far Does the Gambler’s Fallacy Go?

Pierre-Simon Laplace, a French mathematician who lived over 200 years ago, described this behavior in his work “Philosophical Essay on Probabilities.”

What Causes the Gambler’s Fallacy?

The gambler’s fallacy is a behavioral bias rooted mainly in the belief in the law of small numbers. People wrongly assume that small samples are always representative of the larger population or outcome.

How to Avoid the Gambler’s Fallacy?

In trading and investing, people can avoid the gambler’s fallacy by rejecting the belief that past events dictate future outcomes. To achieve this, traders and investors should rely on independent research, keep up to date with facts, figures, and strategies, monitor trades and results carefully, and actively seek feedback.