Gambler's fallacy

Do you know where is this coming from?. It is tested in Schweser practice exams in a question dedicated to behavior finance but I can’t remember I’ve seen anywhere before

Risking more to make up for past losses? Check SS 3 or 4.

Example from reading was 3-4 straight heads, what do you expect next to be? Most said tails, when answer is still 50/50 chance assuming fair coin. other example was the dude (Barton Biggs maybe?) from the Fortune interview saying “market has been way above average for years, we’re due for a few years below average”. In other words, yes, regress to mean, but not below or above it.

Thanks. I checked CFAI Index and found in Reading 9, footnote 11 in page 31 of V2, However, I couldn’t find it in Schweser notes nor in their behavioral terms blog!

That’s why CFAI is better …

SteelerFan Wrote: ------------------------------------------------------- > Example from reading was 3-4 straight heads, what > do you expect next to be? Most said tails, when > answer is still 50/50 chance assuming fair coin. > other example was the dude (Barton Biggs maybe?) > from the Fortune interview saying “market has been > way above average for years, we’re due for a few > years below average”. In other words, yes, > regress to mean, but not below or above it. Isn’t this the law of large numbers crap?

I believe it refers to the investor believing that sooner or later, the stock will turn around (i.e. holding on to a loser too long). I can never remember if this is fear of regret or loss aversion.

This is referred to as “the law of small numbers” in Schweser. Example: Flip coin 3 tiimes in a row, all heads. Gambler’s Fallacy: Gambler says it’s got to be heads on the 4th time, even though the odds on the next flip are still 50/50

In general, gambler’s fallacy is that people think the law of large #s is applicable to small samples as well.

chintz Wrote: ------------------------------------------------------- > In general, gambler’s fallacy is that people think > the law of large #s is applicable to small samples > as well. Nailed that one on the head… good post.

My Fallacy was thinking that JoeyD wasn’t going to Crap out at Atlantic City this weekend so I thought \$1,000 down on the pass line and he Crapped out…Thanks Joey.

PJStyles Wrote: ------------------------------------------------------- > chintz Wrote: > -------------------------------------------------- > ----- > > In general, gambler’s fallacy is that people > think > > the law of large #s is applicable to small > samples > > as well. > > > Nailed that one on the head… good post. Thanks PJ. Quoted directly from CFAI text.

Whats the law of large numbers again :)?

bigwilly Wrote: ------------------------------------------------------- > My Fallacy was thinking that JoeyD wasn’t going to > Crap out at Atlantic City this weekend so I > thought \$1,000 down on the pass line and he > Crapped out…Thanks Joey. I was focusing on the cocktail waitress. Sorry, man.

lol

So at what point do you stop thinking that the chance of heads is 50% and start wondering if the coin is fair? Maybe when they start telling you its backed by AAA rated assets or something?

where is Schweser is any of this? or is that the point…