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The Gambler’s Fallacy is the mistaken belief that past events influence future ones, even when each event is independent. This means that if you flip a coin 20 times, it could very well land on heads all 20 times. This may occur because probability isn’t always exact, and can end up being one sided sometimes. Now, you may think that the 21^st toss will end up as tails because of the past events, but this is exactly what makes you a victim of the Gambler’s fallacy; because you just made that belief based on the past, independent outcomes.

The Gambler’s fallacy is also known as the Monte Carlo Fallacy due to the renowned incident at the Monte Carlo Casino in 1913. This was when a roulette wheel landed on black 26 times in a ROW! The chances of that happening are 1 in a whopping 38 MILLION! To put that into perspective, the chances of picking the same 5 cards twice in a row from a deck of 52 cards (randomly, blindfolded, and with reshuffling between picks) is about 1 in 2.6 million. And the Monte Carlo incident had a 1 in 38 million chance of happening!

At that time, the Casino de Monte Carlo was a magnet for the wealthy, elite, and highly experienced gamblers from all across Europe and beyond. This further highlights how the Gambler’s Fallacy can be deceptive to even experienced gamblers.

The Gambler’s Fallacy also plays a role in many people’s financial decisions. Investors may sell a stock thinking they should get out while they’re ahead, before the value falls again. This often leads to premature selling or missing long term growth.

You yourself may have been a victim to this. Let me show you how. If you had a really bad year where for instance, you had your window shatter by a tree falling through it, had your ceiling collapse due to torrential rain, and had your shower pipe burst, you might think to yourself that such a terrible year is highly unlikely to happen again and may reduce your house insurance coverage. This is another example of the Gambler’s fallacy.

Let’s look at another one. A student might be taking an MCQ test and might have answered the past five questions as C. Now that student may think, “I’ve guessed C five times in a row, the next answer has to be a different option”. But even if the next question’s answer really is C, and the student knows the answer, they might still be skeptical, and may pick another wrong option, having fallen victim to the Gambler’s Fallacy. However, in reality, every answer still has a 1 in 4 chance of being correct. Just because of past answers, the likeliness of the future answers doesn’t chance.

Now, how do we manage this? Well, while budgeting, investing, or risk managing, it’s a good idea to stick to well researched strategies.  Relying on data and logic is a much better option than sticking to your gut feeling. Rather than thinking what “should” happen, place your bet based on hardcore facts. Because you must always remember, random sequences have no memory.

So in closing, I guess we can establish that the Gambler’s fallacy is a common mental trap; but recognising it and understanding it are the first steps to overcoming it. No matter what decisions you take, you must look at the facts, not just patterns that may or may not be right.