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Judgment Error in Lottery Play: When the Hot Hand Meets the Gambler’s Fallacy

Author

Listed:
  • Qingxia Kong

    () (Rotterdam School of Management, Erasmus University, 3000 DR, Rotterdam, Netherlands)

  • Georg D. Granic

    () (Erasmus School of Economics, Erasmus University, 3000 DR, Rotterdam, Netherlands)

  • Nicolas S. Lambert

    () (Graduate School of Business, Stanford University, Stanford, California 94305)

  • Chung Piaw Teo

    () (Department of Analytics and Operations & Institute of Operations Research and Analytics, National University of Singapore, Singapore 117592)

Abstract

We demonstrate that lottery markets can exhibit the “hot-hand” phenomenon, in which past winning numbers tend to have a greater share of the betting proportion in future draws even though past and future events are independent. This is surprising as previous works have instead documented the presence of an opposite effect, the “gambler’s fallacy” in the U.S. lottery market. The current literature also suggests that the gambler’s fallacy prevails when random numbers are generated by mechanical devices, such as in lottery games. We use two sets of naturally occurring data to show that both the gambler’s fallacy and the hot-hand fallacy can exist in different types of lottery games. We then run online experimental studies that mimic lottery games with one, two, or three winning numbers. Our experimental results show that the number of winning prizes impacts behavior. In particular, whereas a single-prize game leads to a strong presence of the gambler’s fallacy, we observe a significant increase in hot-hand behavior in multiple-prize games with two or three winning numbers.

Suggested Citation

  • Qingxia Kong & Georg D. Granic & Nicolas S. Lambert & Chung Piaw Teo, 2020. "Judgment Error in Lottery Play: When the Hot Hand Meets the Gambler’s Fallacy," Management Science, INFORMS, vol. 66(2), pages 844-862, February.
  • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:2:p:844-862
    DOI: 10.1287/mnsc.2018.3233
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    File URL: https://doi.org/10.1287/mnsc.2018.3233
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    References listed on IDEAS

    as
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