GAMBLER’S FALLACY:

Have you been the victim of Gambler’s Fallacy???The tossing of a coin is resulted into either ‘heads’ or ‘tails’. If you toss the coin for 9 times and all the tosses get you ‘heads’ then for the 10th toss you are most likely will predict ‘tails’. This is nothing but Gambler’s Fallacy.

It is wrong to assume the 10th outcome will be ‘tails’ just because previous 9 attempts resulted into ‘heads’. Each toss and it’s outcome is independent of each other and the probability for ‘heads’ and ‘tails’ is 50:50. 

I have been into one of the biggest moving Casinos in Singapore Cruise in Singapore. I saw that people normally queue up to a particular slot machine where they have seen someone to have hit a jackpot. But this again is a Fallacy as each machine is similarly programmed and is totally random. The point is you cannot make a judgement based on past experience as the events are absolutely random. Luck plays a role in determining the outcome. 

Inside view of a casino
 

Now, if you carry this attitude of Gambler’s Fallacy in casino I can understand but if the same is applied to investments results can be dangerous. Day trading in markets is highly unpredictable and random yet people place large bets based on certain tip, news or whatever. Market prices get affected by so many factors completely outside our control. However, people often make predictions as to how markets will behave based on yesterday, last week or month. Just because price is going up from last 9 days does not mean it will go up on 10th day too. Similarly unabated fall for 9 days does not mean the trend will continue on the 10th day. 

Beware of Gambler’s Fallacy. If you look for patterns where none exist you are only fooling yourself. 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s