Gambling Tilt - Gambler's Fallacy

Gambling Tilt - Gambler's Fallacy

Gambling Tilt - Gambler's Fallacy

 

What is the gambling bias and how does it relate to our investment?
Hello friends, another post with tips and recommendations for investors, and today I will talk about an interesting bias that I think is important for all of us, investors and entrepreneurs alike, to get to know: Gambler's Fallacy.
Gambling bias is a cognitive bias that makes us think there is a connection between results that have happened in the past and results that have happened in the future. To illustrate, if you tossed a coin and flew out 3 times in a row (and this is a fair coin and not a George Veterinarian coin ?), So many people will be willing to bet that a fourth lamb will see a tree, just because they are less likely to think that a fourth is coming. In the same way, people will be more willing to bet on an odd number in the roulette if only the previous numbers have reached even numbers.
In other words, according to the gambling bias, people conclude that there is a relationship between the previous sequence of events and the next sequence of events, even when the events are independent, and there is not necessarily such a relationship.
And how does this all relate to our investments?
So in fact, most people think that something can be learned about the behavior of markets - the capital market, the real estate market and any other market in fact, from past events, even though sometimes these are independent events.
For example, people believe that if a particular stock or prices in the real estate market have risen sharply over a given period, then the rise is more likely to stop and a period of declines will begin.
And to illustrate the magnitude of the bias, many people already talked in 2010 about the fact that housing prices in the country have gone down, but every year they just kept going up. And the interesting thing is that every year, when it became clear that real estate prices in the country had risen, people reacted with bewilderment - "How much more can you go up?". This nicely shows that they assumed that growth would be more likely to stop, than that it would continue.
By the way, this bias can also affect investors in the exact opposite direction. Many investors tend to look at a particular investment channel that has dropped significantly in recent times, as one that has potential. They conclude that the downturn in the same channel is predicting increases in the near future as it must stop sometime.
What is the conclusion?
It is worth examining markets and investment channels based on economic elements that surround the same markets, and try to clear the background noise. The major players in the major markets are market makers and sophisticated players, who analyze the markets in a cold and relatively balanced manner. Therefore, these cognitive effects hardly play a role in reality. Therefore, we need to know how to manage our investments carefully and consciously. Get to know these cognitive limitations, and know how to neutralize them when needed.

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Responses

  1. Nice idea but no connection between post body and conclusion. Unlike a currency, each currency is an event, in economics there is a principle of cyclicality and therefore transaction analysts always check, among other things, what they used to be.