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Long ago when we used to visit our grandparents (before they passed away), I’d see a lot of our neighbors play mahjong, cards, and that colored dice game (some locals call it “casino”) on the streets. Those kinds of games are fun, but when there’s money involved, the thrill of the risks and potential rewards can make them very addictive. You win some and you lose some (you actually lose a lot more often), but the possibility of winning big keeps you coming back for more.
Unfortunately, it just makes you lose more money. We all know how a gambling addiction ruins people’s lives.
There’s a lot of psychology involved when it comes to gambling, and that’s why it so easy to lose more and more of your hard-earned cash to some slimy dealer at a casino, lottery ticket stand, “gacha” game, or some other similar gambling system, but for now, we’ll talk about one in particular. It’s called the “gambler’s fallacy”.
If you want to avoid losing more money in games of chance, investing, or on other kinds of financial decisions, this is one more lesson that you need to learn.
Coin flips:
A proper coin flip using an ordinary coin will, theoretically, give heads half the time, and tails on the other half. If you flip a coin 10 times, the most likely result is five heads and five tails.
Now imagine this scenario:
- You flip a coin once, and it came up tails.
- You flip it again, and you get tails again.
- You flip it for a third time and you get tails YET AGAIN.
Since you’ve gotten so many tails, you will SURELY get heads on the next couple of flips right?
Wrong, and that is an example of gambler’s fallacy.
What is the Gambler’s Fallacy?
According to Investopedia, this fallacy occurs “when an individual erroneously believes that a certain random event is less likely or more likely, given a previous event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.”
To put it simply, whatever results you had before will NOT affect your next ones (in games of chance).
Using the previous example of the coin flips, getting three, four, five, or six tails in a row is extremely unlikely, but expecting heads to come up next because a set of coin flips should be 50:50 is wrong. Your previous flips do not matter. Your next flip will still be 50:50, so it STILL has a 50% chance of coming up tails AGAIN.
Real life examples
Think of how often gamblers fall for this. People on a losing streak sometimes keep playing because, like expecting the coin to come up heads “real soon”, they think they’ll soon get lucky and win back all their losses… until they end up completely broke.
On the other hand, there are others who think they’re on a lucky streak and feel like they’ll keep winning… until they lose it all on the next bad bets.
Either way, in most casinos and gambling institutions, the odds are against us and, over time, we lose and THEY win.
This also happens on videogames with a lottery or “gacha” system where you pay money to gamble for a rare character, weapon, costume, or some other product in the game. You COULD get what you want on your first few tries, but very often, you’ll end up spending TONS of money before you get what you want. Sometimes, you won’t even get it at all no matter how much you spend, like in Fate/Grand Order.
Gambling fallacy can trick you into thinking in terms of your overall chance considering what you’re willing to spend. For example, if you have a 1% chance to get the ultra rare character, you might think you can “surely” get him or her if you buy 100 tickets. It’s theoretically possible… until it fails in real life.
Remember that in those games, if your first 99 tries failed, your next pull is STILL a 1% chance. Even if you buy MORE tickets, it’ll STILL be 1% on every attempt. Unless the game has a safety net where it will give you what you want after spending a certain amount of money, you’ll almost always end up spending way too much. It’s likely not worth it.
Investing:
The most common disclaimer I’ve seen on a lot of mutual funds is this:
Past performance is no guarantee of future results.
Most funds and investments advertise how well they earned money in the past few years to get you to invest with them. You have to be careful, however, as even though they had amazing results before, that doesn’t mean they’ll CONTINUE having awesome results in the next few years.
An investment’s returns will almost always depend on market movements and the business or fund’s management so having good *fundamentals help. Still, there’s always a bit of luck involved as none of us, not even the best financial professionals, can accurately predict future market trends and disasters with 100% accuracy.
(Note: If you don’t know the difference between *fundamental analysis and technical analysis, click this link to learn more!)
Remember that as investors, all we can really do is make an educated decision based on our research.
Now that you know a bit more about gambler’s fallacy and how it affects us, you can now stop yourself from falling for it more often and stop yourself from losing money, time, and effort because of it.
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