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The Gamber’s Fallacy & The Hot Hand Fallacy

The Gambler’s Fallacy and the Hot Hand Fallacy are two poles of the same flawed paradigm. They are reverse images of the tendency for our brain to believe in a storied, or patterned, outcome. As opposed to the probabilistic reality that individual events may have zero bearing on the preceding or following events. They are human biases.

The Gambler’s Fallacy

The Gambler’s Fallacy says that the longer you sit at a slot machine or roll a dice, events with entirely unrelated outcomes, the chances of winning increase. In the classic description of the Gambler’s Fallacy the player believes that if a coin has flipped three heads, the chances are increased that on the next go it is inclined to flip a tail. It’s the idea that averages even out the odds. But, unfortunately for the gambler, each toss of a coin is entirely independent of probabilistic outcome and there is just as much a reason to expect a head or a tail at 50/50 odds after 10,000 coin flips of heads.

The number of preceding outcomes has no relationship to the next.

The Hot Hand Fallacy

The Hot Hand Fallacy says that a winning streak will continue winning, even though each event is unrelated to the previous events. This is the flip side to the same flawed thinking as we saw with the Gambler’s Fallacy.

In the classic example of the Hot Hand Fallacy the dice roller continues to roll because it’s obvious to the gambler that the preceding successful rolls reveal a greater chance of winning on the next roll. A pattern created in the mind suggests that success must continue. However, as explained in the Gambler’s Fallacy, where events are probabilistically unrelated (each roll of a dice is the same as the next) there can be no relationship between past and future outcomes. Each outcome is unique.

What This Means in Business

The take-away from these two simple fallacies is that our brains are wired to construct stories out of unrelated events. Our brains are highly creative pattern matching machines. And our brains harbour huge amounts of inherent biases that we need to be aware are behind our decisions.

It’s easy, for example, to look at an investment opportunity or a potential hire and think that because the last three were not good then the next one must be a good deal. Or, with the Hot Hand Fallacy, to say that we’re on a roll so why the hell not jump into the next one boots and all. It’s what human beings do. We make stories to shape our World.

However, given the information at hand that these biases (fallacies) exist in your brain you are capable of being smarter in your decision making. Imagine treating each decision (investment or hire) as individual merit-based propositions. Well, I guess we can work on it; in the meantime it’s enough to know the way our brain thinks and try to accommodate it’s biases.

Yes, you’ll probably feel the inclination to buy into both the Gambler’s Fallacy and the Hot Hand Fallacy in your decisions. But that doesn’t mean you have to succumb to falling victim to them.

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About the Author

Steven Clark Steven Clark - the stand up guy on this site

My name is Steven Clark (aka nortypig) and I live in Southern Tasmania. I have an MBA (Specialisation) and a Bachelor of Computing from the University of Tasmania. I'm a photographer making pictures with film. A web developer for money. A business consultant for fun. A journalist on paper. Dreams of owning the World. Idea champion. Paradox. Life partner to Megan.

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