Imagine you are playing roulette in Vegas [basically a game where you spin this thing and a ball lands either in red or black with about equal odds for either]. Red has appeared the last 7 times. Do you put all your life savings on black? I mean, its got to come up next right? What are the chances of red again? After all, the odds of red appearing 8 times in a row is about 0.4% - Very freaking low!

Your answers to the above questions should be firm and resounding no, no, and 50% (damn close at least).  Why!?

Even though these answers may be obvious, many intelligent people still live by the false logic of believing in spotting trends in independent events - especially when making emotional or financial decisions.  Even if it is black 30 times in a row the odds do not change.  This is called the gambler’s fallacy.  It basically means you try to look for patterns or a sequence even though you are looking at independent events. Everyone’s fallen prey to this sort of thinking at one point or another. Knowing what it is and keeping it in the back of your head will help you avoid making stupid decisions.

We need to always remember this when making business and financial decisions.  You often see this logic when people talk about their stock picks.  They pick a few stocks that are all providing negative returns and they think….

I have been in a slump but I am bound to pick a good one soon.

The reality of the situation is that they are independent events that do not change the probability of the next.

Ever been in a similar situation or made a foolish decision because of Gambler’s fallacy? Share in the comments!