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.

BREAKING DOWN '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 TERMS
  1. Behavioral Economics

    The study of psychology as it relates to the economic decision ...
  2. Behavioral Finance

    A field of finance that proposes psychology-based theories to ...
  3. Anchoring

    The use of irrelevant information as a reference for evaluating ...
  4. Prospect Theory

    A theory that people value gains and losses differently and, ...
  5. Gambling Loss

    A loss resulting from games of chance or wagers on events with ...
  6. Mental Accounting

    An economic concept established by economist Richard Thaler, ...
Related Articles
  1. Active Trading Fundamentals

    An Introduction To Behavioral Finance

    Curious about how emotions and biases affect the market? Find some useful insight here.
  2. Options & Futures

    Handicap The Market, Rack Up Gains

    Investing on Wall Street and gambling on The Strip are not as different as they may seem.
  3. Active Trading Fundamentals

    Leading Indicators Of Behavioral Finance

    Discover how put-call ratios and moving averages can be used to analyze investor behavior.
  4. Markets

    The (Expected) Market Impact of the 2016 Election

    With primary season upon us, investor attention is beginning to turn to the upcoming U.S. presidential election.
  5. Term

    How Statistical Significance is Determined

    If something is statistically significant, it’s unlikely that it happened by chance.
  6. Economics

    3 Charts All Investors Should See

    Given the abysmal start to the year, the defining question is whether this is another painful but temporary correction, or the start of a bear market.
  7. Investing

    2 Opportunities Amid Today’s Market Volatility

    As you prepare your portfolio for the market volatility ahead this year, here are a few investing ideas to consider.
  8. Personal Finance

    Powerball Mania: Take the Annuity?

    Should you win the lottery, you need to decide how to accept your winnings: lump sum or annuity payouts. Here's how to choose.
  9. Mutual Funds & ETFs

    (EWT, FTW, QTWN) 3 Best Taiwan ETFs for 2016

    Examine detailed analysis of three exchange-traded funds that track the Taiwan equity market, and learn about the characteristics and suitability of these ETFs.
  10. Mutual Funds & ETFs

    (ENOR, NORW) 2 Best Norway ETFs for 2016

    Learn about the top two exchange-traded funds, or ETFs, that track the Norway equity market, and explore analyses of their characteristics and suitability.
RELATED FAQS
  1. Do plane tickets get cheaper closer to the date of departure?

    The price of flights usually increases one month prior to the date of departure. Flights are usually cheapest between three ... Read Full Answer >>
  2. Is Colombia an emerging market economy?

    Colombia meets the criteria of an emerging market economy. The South American country has a much lower gross domestic product, ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. What are some of the more common types of regressions investors can use?

    The most common types of regression an investor can use are linear regressions and multiple linear regressions. Regressions ... Read Full Answer >>
  5. What types of assets lower portfolio variance?

    Assets that have a negative correlation with each other reduce portfolio variance. Variance is one measure of the volatility ... Read Full Answer >>
  6. When is it better to use systematic over simple random sampling?

    Under simple random sampling, a sample of items is chosen randomly from a population, and each item has an equal probability ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
Trading Center