Gambler's Fallacy

What is Gambler’s Fallacy?

As per the Gambler’s Fallacy meaning - past events do not have an impact on the future. What happened in the past or a series of events you faced in the previous years is not going to increase or decrease the probability of a certain random event taking place in the future.

It is commonly known as the Monte Carlo Fallacy. This term was coined in 1913 when it was first observed in one of the popular casinos in Las Vegas. The events that occur in the present or future have nothing to do with a series of events you have already experienced. However, gambler’s fallacy is quite common among investors. They take the past Trading sessions and stock movements into account to determine future stock trends.

How did it get the Name Monte Carlo Fallacy?

One of the best examples of Gambler’s Fallacy was observed in the Las Vegas casino named “Monte Carlo”. That’s the reason why it is also known as Monet Carlo Fallacy. Basically, the gamblers were playing roulette. The ball had been falling on the black side repeatedly. This event led the gamblers to purchase chips for the red square. It made them believe that the ball will fall on the red square soon.

They kept purchasing the red square chips hoping for the ball to stop at the red section. However, the ball fell on the black section for 27 times. Finally, it landed on the red square after several turns. According to research, the gamblers playing the roulette at the Monte Carlo casino had lost millions of dollars by this time. They kept waiting for the ball to Land at the red square and ended up shelling thousands of dollars out.

This was the first event when an inaccurate prediction due to a series of past events led to a loss of millions of dollars. The same concept can be seen in trading and stock investments. Many investors exit the Market when the value of the stock keeps increasing. They fear the sudden decline in the share value. In other words, they believe the position of the stock will fall after the series of gains. Let’s understand this concept with an example.

Gambler’s Fallacy Example

Let’s say you have participated in a toss and you are using a coin to decide the winner. Now, the coin lands with the tails side repeatedly. Just because the coin has landed with the tails side does not mean the probability of the heads side appearing in the next Flip is higher. The probability of the coin landing with heads or tails sides up is still 50-50. The previous flip has nothing to do with the next flips.

For instance, if someone offered you Rs. 100 to bet that the coin will land with the head side 12 times, then a smart decision is to turn the offer down. However, if the heads have appeared 11 times already, then there is a 50% chance it will be heads in the 12th flip.