Gambler’s Fallacy

The Issue:

This is the false believe that if something happens more frequently than normal, that it’ll happen less frequently in the future. After heads comes up eight times in a row, you’d probably

heads or tails

be more willing to gamble that the next flip will be tails than heads. For investors who watch the price movements of shares as an indication of when to invest, this heuristic can result in poor timing and premature changes in strategy.

The Solution:

Once you’ve identified the gambler’s fallacy, it’s easier to overcome the bias simply by realizing that a flip of a coin is always a 50% chance of either outcome or similarly, that trends are unpredictable. It is worth noting that outcomes including economics, employ the input of such a huge number of variables, it’s close to impossible to predict directional changes with consistent accuracy.

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