The Gambler’s Fallacy

This post is the eleventh part of a series of business-friendly posts, looking at cognitive biases and how they impact our ability to communicate and operate effectively.

What is it?

The Gambler’s Fallacy is based on the idea (or feeling) that if something happens more frequently now, it will happen less frequently in the future, as if there is a natural balancing act that has to take place. It is most commonly known in games of chance (hence Gambler’s Fallacy), whereby an individual, having lost bet after bet after bet, believes that there is an improved chance of winning on the next bet. If you are betting on a coin toss, calling tails every time and 50 heads come up in a row, you start to believe that “the next one HAS to be tails.” Of course it doesn’t — the probability never deviates from 0.5.

Why it occurs:

Central to the concept of Gambler’s Fallacy is that people underestimate the likelihood of sequential streaks occurring by chance — leading to decisions that result in errors. As with a few other cognitive biases, we struggle to recognise that small sample sizes are not representative of an entire population.

Where might you see it occur in real life?

It is most famous in a gambling context — sitting at the roulette wheel having lost 10 times in a row and believing that the odds of you winning the spin have increased because “surely you MUST win now”. If I were to toss a coin ten times in a row, and HHHHHHHHH were to come up, the chances of seeing heads on the final toss are exactly the same as seeing tails — but I bet you’ll put money on tails. The same thinking applies to many real-life situations. Think of the expectant parents who, after having three girls in a row, feel that they are due to have a boy, the next child has to be a boy.

Researchers have demonstrated the fallacy evident in truly high-stakes decision making such as asylum refugee court decisions, loan application reviews and high-level sports, where judges, officers and referees, after making several decisions in a row in one direction, “even things out” in the next call, even when it is closely related to the other calls.

Why is it important?

Humans sometimes don’t judge a situation based on its merits, but on other non-existent factors they believe are controlling the situation.

What is the impact in business?

It can be difficult to judge, but it comes down to looking out for decisions being made based on small sample sizes. Let’s look at a few sales and pitch based examples.

If you are a sales rep and have made five poor calls in a row, you might expect the sixth call to go well because you ‘are due’ a good call. That’s dangerous because without evaluating why the calls went badly and without changing your own behaviour, there is no reason to believe the call *should* go any better. The universe doesn’t owe you.

When you are pitching deals, to investors or potential customers, the same applies: If you keep getting a bad result, that doesn’t mean a good result is due — and it’s dangerous to believe so. You may need to work hard to turn it around. If you are on the other side of the fence, as an investor or customer, remember too that just because you have seen four or five bad pitches today, it doesn’t mean you need to give the next one a seal of approval. Similarly, if you’ve seen four or five great pitches today, you don’t need to throw the next one out to balance things out.

We can attempt to combat the Fallacy: When you are pitching an idea in a competitive situation, be aware of what your audience has already been through. If they have seen five or six pitches already, think about their frame of mind — have they seen several good ideas already? If so, it’s possible their mind will want yours to be poor. What are you going to do to combat that?

If you want to know more please feel free to connect or check out a collection of cognitive biases here. Next up we will take a look at the Courtesy Bias.