Is the Gambler's Fallacy Really a Fallacy?
The behavior known as the gambler's fallacy is exhibited when gamblers increase their wager after a series of losses. The conventional interpretation of this behavior is that, after a series of losses, the gambler views the probability of winning as having increased. However, if the probability is independently and identically distributed (as it normally is), previous losses do not affect the probabilities of subsequent gambles, hence the fallacy. This paper suggests an alternative explanation for the gambler's fallacy behavior. It holds that the gambler views the probability of a series of (outcomes resulting in) losses as very small. Therefore, from an ex ante perspective, consumers strategize that if they lose, they will increase their wagers because a long series of losses is unlikely. A simulation demonstrates the rationality of the gambler's fallacy behavior by showing positive winnings when the theoretical expected winnings are $0. This same behavioral assumption is also behind the St. Petersburg Paradox. The difference is that the low probability of a series motivates people to gamble with the gambler's fallacy, but motivates people not to gamble with (or more accurately, not pay very much for) the St. Peters Paradox. If anything, the gambler's fallacy is a fallacy regarding the adequacy of the consumer's bankroll, rather than a fallacy regarding a change in the probability of winning.
Volume (Year): 1 (2007)
Issue (Month): 3 (November)
|Contact details of provider:|| Web page: http://www.ubpl.co.uk/|
|Order Information:|| Web: http://www.jgbe.com/index_files/Page492.htm Email: |
When requesting a correction, please mention this item's handle: RePEc:buc:jgbeco:v:1:y:2007:i:3:p:165-170. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson, College of the Holy Cross)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.