Posted on : September 11, 2016
Views : 428
Category : Economics
Chicago Booth Business School’s Kelly Shue discusses The “gambler’s fallacy,” the common yet mistaken belief that, for example, the probability of a coin flip showing heads or tails changes, doesn’t just affect bets at a casino. Kelly describes how it can impact decisions with important consequences. The gambler’s fallacy, also known as the Monte Carlo fallacy or the fallacy of the maturity of chances, is the mistaken belief that, if something happens more frequently than normal during some period, it will happen less frequently in the future, or that, if something happens less frequently than normal during some period, it will happen more frequently in the future (presumably as a means of balancingnature). In situations where what is being observed is truly random (i.e., independent trials of a random process), this belief, though appealing to the human mind, is false. This fallacy can arise in many practical situations although it is most strongly associated with gambling where such mistakes are common among players.The use of the term Monte Carlo fallacy originates from the most famous example of this phenomenon, which occurred in a Monte Carlo Casino in 1913.
  • Behavioral Economics
Gambler’s fallacy arises out of a belief in a “law of small numbers”, or the erroneous belief that small samples must be representative of the larger population. According to the fallacy, “streaks” must eventually even out in order to be representative. Amos Tversky and Daniel Kahneman first proposed that the gambler’s fallacy is a cognitive bias produced by a psychological heuristic called the representativeness heuristic, which states that people evaluate the probability of a certain event by assessing how similar it is to events they have experienced before, and how similar the events surrounding those two processes are. According to this view, “after observing a long run of red on the roulette wheel, for example, most people erroneously believe that black will result in a more representative sequence than the occurrence of an additional red”, so people expect that a short run of random outcomes should share properties of a longer run, specifically in that deviations from average should balance out. source: Wikipedia

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