The Odds, My Friend, Won’t Change

Imagine that you and I were playing a game. A game where, I had to give you hundred bucks if the coin you toss landed tails and where you had to give me a hundred if it landed heads. You start tossing the coin, and land heads five times in a row. You are five hundred bucks short and nearly out of money.

Back in school, in a math class, you were taught that if you tossed a coin ten times, in all likelihood the coin will land heads five times and tails the other five. The probability of a coin toss is 50%. And so, this particular deceitful coin has used up all its ‘heads’. Tide has to turn, because that’s what probabilistic theory tells you. The chances of landing tails are now much higher, you think.

But, the probability of an independent coin toss is always 50%, irrespective of previous outcomes. And so, thinking, “this time it HAS to be tails” is a fallacy!

The Gambler’s Fallacy

This fallacy is termed as Gambler’s Fallacy as it is highly observed in people who take high amounts of uncalculated risks (or risks in general). Think of a gambler at a Poker table. After losing a couple of rounds, he is sure that this time he’ll be dealt better cards. Or the stock broker who feels that tomorrow the market has to turn upwards. Every pair dealt or every level of the index is independent of the previous outcome and so attributing a higher than usual probability to a favorable event is plain wrong.

As a school kid, I never practiced batting, but always believed that the next time I played with my classmates, I’d hit a home-run. The odds were stacking up for me, I’d think. But they weren’t. With no practice going in, each time I picked up a bat was an independent event and so that odds were always poor (5%, I’d say, since I sucked at sports).

However, things would have been different had I practiced after school. Each time, I put in deliberate effort to learn and get better, I would have gotten better, even if it were marginally. Which means, that over time I wouldn’t start from 5% again, but at an increased level of skill and hence a higher probability of hitting a home run.

Don’t fall for it

Gambler’s Fallacy is a bias that has high negative impact on a person’s risk profiles. People tend to gamble more (and therefore lose more) with the false hope that this bias provides. Imagine, taking risks in a corporate scenario, where the stakes are not in hundreds, but in millions.

As with any cognitive bias, the only way out is to be aware of your thoughts. Ask yourself two simple questions, “Am I thinking rationally?” and “Is there another explanation/possibility that I haven’t explored?”

Asking these questions will transfer control of your thoughts and decision-making process to your prefrontal cortex (also known as the PFC or the big lumpy gray matter sitting behind your forehead) which is responsible for the rational thinking that is imperative for complex and risk inducing situations.

Originally published on January 19th, 2013

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