- One of the most prominent examples of the Gambler's Fallacy is the event in Monte Carlo casino in Las Vegas at the beginning of the 20th century, when several people lost millions of dollars.
- In the Monte Carlo casino incident, the roulette ball fell on the black field 27 consecutive times.
- In a coin toss, the chances for either side of the coin to land are always 50-50, regardless of how many times a certain side has already landed.
The gambler's fallacy describes the belief that if an event has happened more times than usual in the past, the possibility of it happening in the future is smaller. It can also work the other way around, meaning that if something happens less often than usual, the probability of it happening in the future increases. That line of thinking is incorrect and is most often correlated to gambling.
Gamblers often believed that if a certain number were not rolled as much as they thought it should, it would start rolling more often in the upcoming rolls. It can be considered a form of superstition. An important example of the phenomenon that happened in the Monte Carlo casino in Las Vegas in 1913, so people sometimes refer to gambler's fallacy as "Monte Carlo fallacy."
The Monte Carlo Casino Example
People use the line of thinking of gambler's fallacy because they do not understand probability accurately. Some people tie this belief to similar concepts in investing. Investors are known to liquidate a trade position after a large number of successful trades. They believe that since they have been successful for a while, it should start to decline soon, but that belief has no logical reason behind it.
The most famous example of gambler's fallacy happened in 1913, in the Monte Carlo casino in Las Vegas. It was during a game of roulette, and it is said that the roulette ball had fallen on black multiple times in a row. People started believing that the ball should fall on a red square soon, so a large number of casino visitors began to bet on red. It took 27 turns of black for the ball to finally fall on red. It is reported that people that were playing then lost several millions of dollars.
How To Understand Gambler's Fallacy
An easy way to understand what gambler's fallacy is by using the flip of a coin. If we flip the coin multiple times and it always lands on the heads side up, most people will believe that the probability of the next flip being tails is rising. However, no matter how many times we get the same flip, the probability of a particular side flipping up is always 50%. The coin flips are not tied to each other, every one of them is a separate event, and neither can influence the future flips.
Gamblers often do not believe that to be the case, and they often look at previous rolls or flips to try and determine the future rolls. They try to look for patterns and believe that what they consider to be an unnatural pattern will be broken soon. So if we tell a gambler to take a large bet on the roulette ball falling on red 11 times in a row, they will most likely decline that bet, if they are following the gambler's fallacy line of thinking.
However, if we offer them the same bet, but we show that the roulette ball has fallen on the black spot ten times in a row, they will believe that the probability of it falling on red is larger, and most likely take the bet. However, the chance is always 50%, every roll has a 50% chance of being one or the other and is entirely independent of the past and future rolls.