Your Mind and Your Money: Gambler’s Fallacy

Welcome to the second in our series of posts about the ways your mind makes it harder for you to manage money intelligently.  Yes, unfortunately the nature way that human minds work can be one of your biggest obstacles to success with your money, so this week, we’re going to uncover some of the biggest mistaken beliefs and do what we can to correct them.  Today, we’re looking at a belief that powers any number of poor bets in Vegas.

Gambler’s Fallacy

The gambler’s fallacy is when you assume that long term probabilities will hold in the short term.  More to the point, you would assume that because something statistically unlikely has just occurred, the laws of probability demand that the opposite result will occur now.  One easy example is if you flip a coin five times and every time it comes up as heads, you might then assume that the next flip should be tails; after all, it’s ‘due’ to come up tails, right?

People still gamble with pennies, right?
People still gamble with pennies, right?

Actually, as any statistician will tell you, it’s not.  Yes, over the long term (thousands or even millions of flips), the totals will be roughly evenly split, but within that series, there will be stretches where tails come up five, ten, twenty or even more times in a row, and similar stretches of heads.  You have no way of knowing if you are at the beginning of a much longer stretch or not; the only thing you know for certain is that there is an equal probability of getting heads or tails on any given flip.

Gambler’s Fallacy Examples

-Thinking that several red results in a row  in roulette means that black is due to come up, or vice versa.  The roulette ball doesn’t ‘remember’ previous results and ‘choose’ where to go next to look good statistically; every time, there’s the same possibility of getting a red as a black.

-Feeling that because your slots machine hasn’t paid out, it’s due to hit (and possibly to hit big) soon.  As with roulette, the slot machine (assuming it is fair and hasn’t been tampered with or altered in some way) doesn’t care whether the last five, fifty, or even five hundred spins have all paid out nothing; the chance that the next spin will pay out is exactly the same as it would be if the last results were all victories.

-Really, anytime you use the words ‘due’ or ‘should’ in conjunction to something based entirely on chance, you’re appealing to the Gambler’s Fallacy.  Past results have no effect on future probabilities, outside of our own perceptions.

Beating the Gambler’s Fallacy

The easiest way to beat the Gambler’s Fallacy is simply not to gamble.  Not only will your wallet thank you for not taking out money when all the odds are against you, but you’ll never have to worry about making improperly considered bets because something is ‘due’ to happen.

If you do gamble, or engage in other activities based on probabilities, you best defense will be to learn and understand those probabilities.  If you know, for example, that there is a 6 in 36 chance of rolling a seven in craps, you won’t be surprised when that’s the most common result.  You also won’t be surprised if, due to the quirks of the dice, you see a few dozen rolls with no sevens, or a dozen sevens in a row.  Remember, the dice don’t know what’s been rolled, and have no need to stick with statistical probabilities in the short run.

That’s pretty much all there is too it; don’t let recent trends convince you that things need to change soon in order to restore the laws of probability.  Trust me, the laws of probability are not going to be worrying about you.

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