Gambler's Fallacy: How Cognitive Bias' Have Kept Gambling In Business

  • Updated
  • By Amy McDonnell
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Have you ever witnessed a roulette table spit out seven black results in a row? Were you convinced the next ball would land on red? Were you shocked when it didn’t happen? Don’t worry, you’re not the only one.

The gambler’s fallacy, aka the Monte Carlo fallacy, is a cognitive bias that highlights how awful humans are a probability. It’s the common belief that if something happens more frequently than normal, it’s less likely to happen in the future.

It’s a belief that we’re all guilty of because humans are built to find patterns and sometimes, there just isn’t a pattern to find. We look at some of the ways this bias manifests in gambling, as well as our day-to-day lives.

50/50 chance

The best example of the gambler’s fallacy is the humble coin toss. We’ve been taught from a young age that the outcome of a coin toss is pretty much 50/50 (allowing for the possible 1% bias), but what happens if you land 20 heads in a row?

You’ve probably said something like “heads are obviously on a lucky streak, but it has to land on tails next.” You land five more heads and can’t believe what you’re seeing. You thought this was 50/50 – where are the tails?!

Well, one of two things is happening. Either, you have a trick coin and you’re being fooled, or you’re not understanding probability correctly. Probably the latter.

A coin toss is 50/50 but that doesn’t mean that you’ll get a 50/50 result from your measly 25 tosses. Every time you throw the coin in the air, the odds reset and there is still a 50/50 chance of it landing on either heads or tails. The outcome has absolutely nothing to do with what’s happened before. Absolutely nothing.

Think about it. Your 5p coin hasn’t suddenly become sentient with an inherent desire to frustrate you. So, how can the previous results have any bearing on what happens next? It can’t – that’s the point.

 

A cautionary tale

This common mistake is one of the reasons casinos are so successful. For example, in 1913, the Casino de Monte-Carlo in Monaco profited from this very fallacy. During an evening in August, a roulette table was the subject of fascination and, for many, financial ruin. The ball kept landing on black. It did it again and again and again.

Convinced the next ball would land on a red number, gamblers continued to put their money on the table. Despite the odds (18/37) never changing, people lost millions because they were certain that the ball would land on red.

But it didn’t, 26 times in a row. That’s the longest recorded streak of a single colour ever recorded.

What the gamblers failed to understand is that the ball previously landing on black can’t (and doesn’t) have any influence over what happens next.

For the ball is a mere inanimate object and in a game of chance, the past has no bearing on the future. While the odds of a ball landing on black 26 times in a row are 136,823,184 to 1, it doesn’t mean you should bet on red.

Real-life consequence

Although dubbed the gambler’s fallacy, this bias isn’t just reserved for the casino, it also has real-world consequences. One of the most troubling examples is loan applications. According to Chen et al, up to 9% of decisions made by loan officers are twisted by the fallacy.

This means that when you submit a loan application, you have a 1 in 10 chance the officer will be influenced by the decisions made on the last few applications that came before yours.

For example, if the officer has just rejected a handful of applications, yours may come as a pleasant surprise, and you could be accepted for an application even if it isn’t perfect. On the other hand, you might get a loan rejected if the candidate right before you had an application that was on the money – literally.

Just remember, in games of chance like roulette or baccarat, don’t be influenced by what’s already happened. Your chances are the same. Every single time. So stop betting on red.

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