Gambler's Fallacy: meaning & examples

Introduction

The Gambler's Fallacy is a fallacy in which people expect chance to correct itself. After a series of the same outcomes, it feels logical that "it must turn around now," when in reality the odds remain exactly the same.

This fallacy is not limited to casinos or lotteries. We also see this pattern in business decisions: marketing campaigns that go on too long because the feeling is that results must come now, investments that are pursued because previous attempts have failed, or expectations based on recent bad luck rather than data.

Precisely because this fallacy feels so intuitive, it is difficult to recognize. In this article, we'll explain what the Gambler's Fallacy is, where it comes from and how to prevent it from unnecessarily clouding decisions.

What is the Gambler's Fallacy?

The Gambler's Fallacy is the brain's tendency to assume that the probability of something happening changes, as a result of what has happened before (Tversky & Kahneman, 1974).

If something has happened more often, one expects the chance of it happening in the future to be smaller. If something has not happened that often before, one expects the probability of it to be greater in the future. The brain unconsciously assumes a causal relationship (causation). This means that something that happens first will affect what happens next.

Ask someone what the probability of throwing six is, and they expect that probability to increase when no six has been thrown 24 times. But the probability of throwing six remains exactly one-sixth. This is true for every throw, because probability does not take into account what happened before and there is no causal relationship. Chance has no memory. And yet our brain has a very different expectation of it. Because of this causal expectation, wrong decisions are made faster.

Experiences and time also play a role. When events occur over a period of time, they affect the expectation of the next event (Barron & Leider, 2010). If you haven't thrown a six 24 times in the past hour, you expect that probability to be higher for the 25th time. But if you ask what the probability of six will be if you throw 25 times in a row later, you are likely to get a different answer. The experience of the previous throws is not there yet.

Our brain naturally tries to see patterns and logic because it does not like random events that cannot be explained. As a result, the brain looks for explanations in previous events when they have nothing to do with it.

Why our brain makes this mistake

Humans are extremely good at recognizing patterns. This is evolutionarily useful, but by chance it works against us. Our brain expects balance and meaning even when events occur completely independently of each other.

With repetition comes the feeling that an opposite outcome becomes more likely. Not because the probability actually changes, but because our brain has trouble with randomness. We confuse chance with systems that correct themselves.

This explains why the Gambler's Fallacy is so persistent: it feels logical even when it is statistically incorrect.

When this is not a fallacy

Not every expectation based on the past is irrational. The Gambler's Fallacy applies only to situations in which events are completely independent and have no memory.

In practice, many business processes do not. Marketing campaigns learn, markets know seasonality and optimizations have cumulative effects. In such cases, previous data may well influence expectations.

The fallacy occurs when chance is treated as if it were a learning system, or when real systems are treated as if they were random. The distinction between the two is crucial to good decisions.

Examples in practice

• Do you play a lottery and haven't won a prize in a long time? Then the step to stop buying lottery tickets may feel heavier because you expect that now it really should be almost your time to win something.
• A mother already has 3 sons, but very much wants another daughter. I guess that should work now, because 4 sons in a row would be quite a coincidence ... wouldn't it?
• The coming winter is bound to be severe because we have not had a severe winter for years.
• A lender who approved the previous application has an 8% lower probability of approving the next application.

Using Gambler's Fallacy to Your Advantage

It is good to realize that customers and suppliers may not know the gambler's fallacy. Keep in mind that their brain tries to see connections, even when there are none. Events that take place or choices you make as a business owner may be connected to what happened before.

Make use of the expected causal relationship

• Raise your prices without much trouble by pointing to inflation.
• Reject requests for leniency by pointing to previously granted requests.
• Point people to a newspaper article about your company to convince them to become customers.

How to avoid the Gambler's Fallacy in decisions

The best way to avoid this fallacy is to decouple decisions from feelings and set expectations in advance.

• Define measurement periods and evaluation moments in advance so that decisions are not made based on short series.
• Set criteria in advance for stopping, scaling up or adjusting, regardless of previous outcomes.
• Distinguish between chance and systems with feedback: not every sequence contains information.
• Avoid statements like "things must be getting better now" without underlying data to support it.

Structure and predetermined decision rules are the most effective antidote to this bias.

Conclusion

The Gambler's Fallacy shows how tempting it is to base expectations on feeling rather than chance and data. It is precisely with repetition that people start to see patterns that aren't there, resulting in decisions being pushed too long or misinterpreted.

For entrepreneurs and marketers, the distinction between chance and systems of feedback is essential. Those who keep this distinction sharp and structure decisions avoid mistaking noise for direction.

Do you work with marketing data, experiments or performance campaigns? Then recognizing and avoiding these types of thinking mistakes is crucial. See how we approach this as a marketing agency.

Resources

Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases. science,185(4157), 1124-1131. doi:10.1126/science.185.4157.1124

Barron, G., & Leider, S. (2010). The role of experience in the Gambler's Fallacy.Journal of Behavioral Decision Making,23(1), 117-129. doi:10.1002/bdm.676