Gambler's Fallacy
 |
Definition of 'Gambler's Fallacy'When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future. |
 |
Investopedia explains 'Gambler's Fallacy'For example, consider a series of 20 coin flips that have all landed with the "heads" side up. Under the gambler's fallacy, a person might predict that the next coin flip is more likely to land with the "tails" side up.This line of thinking represents an inaccurate understanding of probability because the likelihood of a fair coin turning up heads is always 50%. Each coin flip is an independent event, which means that any and all previous flips have no bearing on future flips. This can be extended to investing as some investors believe that they should liquidate a position after it has gone up in a series of subsequent trading session because they don't believe that the position is likely to continue going up. |
Related Definitions
Articles Of Interest
-
An Introduction To Behavioral Finance
Curious about how emotions and biases affect the market? Find some useful insight here. -
Leading Indicators Of Behavioral Finance
Discover how put-call ratios and moving averages can be used to analyze investor behavior. -
Handicap The Market, Rack Up Gains
Investing on Wall Street and gambling on The Strip are not as different as they may seem. -
Regression Basics For Business Analysis
This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how. -
The Downward Spiral Of Trading Addiction
Trading in the financial markets is stimulating, exciting and engrossing. But one can become addicted, just like with actual casino gambling or illegal drugs. Like any severe addiction, this ... -
Breaking Down The Geometric Mean
Understanding portfolio performance, whether for a self-managed, discretionary portfolio or a non-discretionary portfolio, is vital to determining whether the portfolio strategy is working or ... -
Tracking Volatility: How The VIX Is Calculated
When market volatility spikes or stalls, newspapers, websites, bloggers and television commentators all refer to the VIX®. Formally known as the CBOE Volatility Index, the VIX is a benchmark ... -
Follow The Herd In Trading The Capital Market
If you have ever heard "the trend is your friend" and believed it, you may be a fan of herd instinct mentality. This is an environment where, just like with fashion, masses of people follow a ... -
Arbitrage Squeezes Profit From Market Inefficiency
This influential strategy capitalizes on the relationship between price and liquidity. -
Quants: The Rocket Scientists Of Wall Street
Blend math, finance and computer skills to command a high - and well deserved - salary.
Free Annual Reports