Mind Trap #5 | The Gambler's Fallacy

 

"When investing, the gambler's fallacy will falsely inspire you to see patterns and lead you to think that you can control risk."

 This blog is part of our series of some advanced Mind Traps which will help you overcome difficult situations and equip you with more wisdom for daily living. These include:

1. Cognitive Dissonance
2. Spotlight Effect
3. Anchoring Effect
4. Halo Effect
5. Gambler's Fallacy
6. Contrast Effect
7. Confirmation Bias
8. Baader-Meinhoff Phenomenon
9. Zeigarnik Effect

 

Gambler's Fallacy

Gambler's fallacy is a mistaken belief that the outcome of a random event is influenced by previous outcomes, even when the events are independent and the probabilities remain the same. It leads people to think that if a certain outcome has occurred more frequently in the past, it is less likely to happen in the future, or vice versa. However, in reality, the probability of an event remains unchanged regardless of past occurrences.

Imagine you are playing a game where you have to flip a coin. The coin has two sides, heads and tails. Each time you flip it, there is a 50% chance it will land on heads and a 50% chance it will land on tails.

The Gambler's fallacy happens when someone starts to believe that if they flip the coin and it lands on heads multiple times in a row, then it is now more likely to land on tails. Or if it lands on tails multiple times in a row, then it is now more likely to land on heads. But this is not true.

The truth is, every time you flip the coin, the chances of it landing on heads or tails are always the same - 50% each time. The previous flips do not affect the outcome of the next flip. So, even if the coin lands on heads many times in a row, the chances of it landing on heads or tails are still the same for the next flip.

• Experiment 
• Coin flipped 3 times and it turns Heads all 3 times
• You are asked to bet on what will be the result when coin is flipped 4th time
• Most people choose Tails 
• even though the first 3 flips have no effect on the fourth
• People tend to choose tails in coin flips even though heads is equally likely, due to the belief in a balancing force in the universe 
• People are almost always more invested in the idea of a balancing force
• Experiment 2 
• Sequence1 
• Heads, Tails, Tails, Heads, Tails, Heads
• Sequence2 
• Tails, Tails, Tails, Tails, Tails, Tails
• Which one is more probable?
• Most would pick Sequence1
• Both sequences are equally probable
• There’s no balancing force
• Casinos love this 
• people falsely believe they can predict outcome of a roll
• This fallacy is applied anywhere there’s a sequence of decisions 
• Example 
• remember the awkward feeling you get when you’ve answered 5 C’s in a row in an exam
• Research 
• Loan Approvals 
• if the previous two applicants were rejected, your chance of approval are high
• if the previous tow applicants were accepted, your are more likely to be rejected
• How to fix? 
• Take note of events occurring in a sequence
• tag them → independent events OR interdependent events
• independent events are not influenced by any balancing forces of nature

Keep reading. Keep thinking.
Set Big Hairy Audacious Goals.

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