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Gambler’s Fallacy – Why Past Results Don’t Predict Future Outcomes
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What this lesson covers
The gambler's fallacy is the belief that odds even out in the short run, so a run of one outcome makes the other more likely. The lesson uses the roulette wheel to make the point: a ball that has landed on red several times in a row has not made black any more likely, because the wheel has no memory of previous spins. Traders make the same error constantly, telling themselves a losing run means a winner is due, or that a market which has risen for five days must fall on the sixth. The lesson explains why independent events do not owe you anything, how the fallacy leads directly to increased position sizes at exactly the wrong moment, and how probability thinking corrects it.