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A Subjective Theory of Belief in the Gambler's Fallacy

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  • Jawwad Noor
  • Fernando Payró Chew

Abstract

Studies suggest that people often believe that random processes exhibit reversion to the mean, regardless of the size of the sample. In a canonical coin-tossing environment, a belief in mean reversion towards some bias θ∗ is straightforward to define if it is assumed that the tosses are objectively i.i.d. with bias θ ∗ . In this paper we define and represent a belief in mean reversion without assuming the existence of an objective random process. This decouples the notion of a belief in mean reversion from the notion of misspecified beliefs that is predominantly used in the literature.

Suggested Citation

  • Jawwad Noor & Fernando Payró Chew, 2026. "A Subjective Theory of Belief in the Gambler's Fallacy," Working Papers 1588, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:1588
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Matthew Rabin, 2002. "Inference by Believers in the Law of Small Numbers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 775-816.
    4. Daniel L. Chen & Tobias J. Moskowitz & Kelly Shue, 2016. "Decision Making Under the Gambler’s Fallacy: Evidence from Asylum Judges, Loan Officers, and Baseball Umpires," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1181-1242.
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    Keywords

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    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D9 - Microeconomics - - Micro-Based Behavioral Economics

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