The cross-sectional “Gambler's Fallacy”: Set representativeness in lottery number choices

Jaimie W. Lien and Jia Yuan

Journal of Economic Behavior & Organization, 2015, vol. 109, issue C, 163-172

Abstract: Traditionally, the Gambler's Fallacy is described as the belief that a sequence of independent outcomes over time should exhibit short-run reversals. The underlying psychological bias thought to drive this fallacy is Representativeness Bias: the idea that even a small sample of outcomes should closely reflect the theoretical probability distribution (Tversky and Kahneman, 1971). Yet representativeness also has less commonly explored consequences in the cross-sectional dimension. We find strong evidence for this in lottery play where probabilities are well-defined and transparent, using a dataset of over 1.6 million lottery tickets purchased by over 28,000 players. Specifically, individuals prefer number combinations that are cross-sectionally representative of the uniform distribution from which they are drawn. We test two possible approaches to implementing representativeness; a heuristic 3-bin approach which is promoted in some gambling advice literature, and a direct optimization approach in which gamblers try to spread the numbers in the chosen set as evenly as possible across the lottery number range. By both measures, gamblers over-gravitated to highly representative lottery number sets and over-avoided less representative sets, compared to the proportions that the true lottery odds would suggest. In this pari-mutuel lottery setting, a cost is incurred by gamblers with this type of bias, by reducing their expected winnings.

Keywords: Belief biases; Representativeness Bias; Gambler's Fallacy; Lottery gambling (search for similar items in EconPapers)
JEL-codes: D01 D03 D81 L86 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:109:y:2015:i:c:p:163-172

DOI: 10.1016/j.jebo.2014.10.011

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