How Experience Confirms the Gambler's Fallacy when Sample Size is Neglected

Joshua Benjamin Miller and Adam Sanjurjo
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Joshua Benjamin Miller: The University of Melbourne

No m5xsk, OSF Preprints from Center for Open Science

Abstract: The Gambler's Fallacy is the mistaken belief that random sequences have a systematic tendency towards reversal, i.e. that streaks of similar outcomes are more likely to end than continue. Despite broad empirical support for gambler´s fallacy beliefs, there exists little formal explanation of why such beliefs persist. We present a simple model in which an individual formulates his beliefs about the probability of success given recent success via repeated exposure to random sequences. For each sequence he focuses on the proportion of success given recent success and then updates his beliefs, but (partially) neglects sample size. This results in probability beliefs which, in the limit, are smaller than the true (conditional) probability, i.e. gambler's fallacy beliefs. We discuss the model's novel testable predictions.

Date: 2018-10-30
New Economics Papers: this item is included in nep-evo
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:osf:osfxxx:m5xsk

DOI: 10.31219/osf.io/m5xsk

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