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Predicting Lotto Numbers: A Natural Experiment On The Gambler'S Fallacy And The Hot-Hand Fallacy

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  • Sigrid Suetens
  • Claus B. Galbo-Jørgensen
  • Jean-Robert Tyran

Abstract

We investigate the "law of small numbers" using a unique panel data set on lotto gambling. Because we can track individual players over time, we can measure how they react to outcomes of recent lotto drawings. We can therefore test whether they behave as if they believe they can predict lotto numbers based on recent drawings. While most players pick the same set of numbers week after week without regards of numbers drawn or anything else, we find that those who do change, act on average in the way predicted by the law of small numbers as formalized in recent behavioral theory. In particular, on average they move away from numbers that have recently been drawn, as suggested by the "gambler’s fallacy," and move toward numbers that are on streak, i.e. have been drawn several weeks in a row, consistent with the "hot hand fallacy."
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Suggested Citation

  • Sigrid Suetens & Claus B. Galbo-Jørgensen & Jean-Robert Tyran, 2016. "Predicting Lotto Numbers: A Natural Experiment On The Gambler'S Fallacy And The Hot-Hand Fallacy," Journal of the European Economic Association, European Economic Association, vol. 14(3), pages 584-607, June.
  • Handle: RePEc:bla:jeurec:v:14:y:2016:i:3:p:584-607
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    File URL: http://hdl.handle.net/10.1111/jeea.2016.14.issue-3
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    References listed on IDEAS

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    1. Theo Offerman & Joep Sonnemans, 2004. "What's Causing Overreaction? An Experimental Investigation of Recency and the Hot-hand Effect," Scandinavian Journal of Economics, Wiley Blackwell, vol. 106(3), pages 533-554, October.
    2. Suetens, Sigrid & Tyran, Jean-Robert, 2012. "The gambler's fallacy and gender," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 118-124.
    3. Rachel Croson & James Sundali, 2005. "The Gambler’s Fallacy and the Hot Hand: Empirical Data from Casinos," Journal of Risk and Uncertainty, Springer, vol. 30(3), pages 195-209, May.
    4. Camerer, Colin F, 1989. "Does the Basketball Market Believe in the 'Hot Hand'?," American Economic Review, American Economic Association, vol. 79(5), pages 1257-1261, December.
    5. Terrell, Dek, 1994. "A Test of the Gambler's Fallacy: Evidence from Pari-mutuel Games," Journal of Risk and Uncertainty, Springer, vol. 8(3), pages 309-317, May.
    6. Muriel Niederle & Lise Vesterlund, 2007. "Do Women Shy Away From Competition? Do Men Compete Too Much?," The Quarterly Journal of Economics, Oxford University Press, vol. 122(3), pages 1067-1101.
    7. Alok Kumar, 2009. "Who Gambles in the Stock Market?," Journal of Finance, American Finance Association, vol. 64(4), pages 1889-1933, August.
    8. Elena Asparouhova & Michael Hertzel & Michael Lemmon, 2009. "Inference from Streaks in Random Outcomes: Experimental Evidence on Beliefs in Regime Shifting and the Law of Small Numbers," Management Science, INFORMS, vol. 55(11), pages 1766-1782, November.
    9. Matthew Rabin, 2002. "Inference by Believers in the Law of Small Numbers," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 775-816.
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    Citations

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    Cited by:

    1. Powdthavee, Nattavudh & Riyanto, Yohanes E., 2012. "Why Do People Pay for Useless Advice? Implications of Gambler's and Hot-Hand Fallacies in False-Expert Setting," IZA Discussion Papers 6557, Institute for the Study of Labor (IZA).
    2. Michał Wiktor Krawczyk & Joanna Rachubik, 2018. "Verifying the representativeness heuristic: A field experiment with real-life lottery tickets," Working Papers 2018-03, Faculty of Economic Sciences, University of Warsaw.
    3. Suetens, Sigrid & Tyran, Jean-Robert, 2012. "The gambler's fallacy and gender," Journal of Economic Behavior & Organization, Elsevier, vol. 83(1), pages 118-124.
    4. Karsten Hueffer & Miguel A. Fonseca & Anthony Leiserowitz & Karen M. Taylor, 2013. "The wisdom of crowds: Predicting a weather and climate-related event," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 8(2), pages 91-105, March.
    5. Joshua B. Miller & Adam Sanjurjo, 2014. "A Cold Shower for the Hot Hand Fallacy," Working Papers 518, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    6. Daniel J. Benjamin & Don A. Moore & Matthew Rabin, 2017. "Biased Beliefs About Random Samples: Evidence from Two Integrated Experiments," NBER Working Papers 23927, National Bureau of Economic Research, Inc.
    7. Nattavudh Powdthavee & Yohanes E. Riyanto, 2012. "Why Do People Pay for Useless Advice?," CEP Discussion Papers dp1153, Centre for Economic Performance, LSE.
    8. Kevin He, 2018. "Mislearning from Censored Data: Gambler's Fallacy in a Search Problem," Papers 1803.08170, arXiv.org.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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