Gambler’s Fallacy

Gambler’s fallacy, or Monte Carlo fallacy, is, simply put, a belief that your chances of profit are increasing after series of losses. Or, if something didn’t happen for very long time, that chances magically become higher that it will.

Or, opposite, a belief that probability is equal (50/50), when in reality it is not, like shorting assets that are generating profits, purely on the fact that they are growing.

If the system is independent, i.e. random, then randomness of which is evident only after big numbers of events.

For example, all martingale gambling or trading, also “chartist” type of“strategies” rely on this psychological illusion. You can find many books of famous authors, who don’t go any further belief in some sort of magic dependency, when actually data is mostly random if meaningful time horizons would be taken into account. Better see A Random Walk Down Wall Street, by Burton G. Malkiel.

Basically, gambler’s fallacy is a belief in that small numbers can represent The Real. If applied to “life economics”, without gambler’s fallacy, you don’t have successful or unsuccessful periods, you just have life.