Judgment Error in Lottery Play: When the Hot-Hand Meets the Gambler’s Fallacy

35 Pages Posted: 11 Jul 2019

See all articles by Qingxia Kong

Qingxia Kong

Erasmus University Rotterdam (EUR)

Georg D. Granic

University of Antwerp

Nicolas S. Lambert

Stanford Graduate School of Business - Knight Management Center

Chung-Piaw Teo

NUS Business School - Department of Decision Sciences

Date Written: October 3, 2018

Abstract

We demonstrate that lottery markets can exhibit the “hot-hand” phenomenon, in which past winning numbers tend to receive a greater share of the bets in future draws, even though past and future events are independent. This finding is surprising, as works by Clotfelter and Cook (1993) and Terrell (1994) have previously documented the presence of an opposite effect — the “gambler’s fallacy” — in the U.S. lottery market. The current literature also suggests that the gambler’s fallacy prevails when random numbers are generated by mechanical devices, such as in lottery games (Ayton and Fisher 2004, Burns and Corpus 2004, Caruso et al. 2010). We use two sets of naturally occurring data to show that both the gambler’s fallacy and the hot-hand fallacy can exist in different types of lottery games. We then run online experimental studies that mimic lottery games with one, two, or three winning numbers. Our experimental results show that the number of winning prizes impacts behavior. In particular, whereas a single-prize game leads to a strong presence of the gambler’s fallacy, we observe a significant increase in hot-hand behavior in multiple-prize games with two or three winning numbers.

Keywords: Perception of Randomness, Hot-Hand Fallacy, Gambler’s Fallacy, Lottery Game

Suggested Citation

Kong, Qingxia and Granic, Georg and Lambert, Nicolas S. and Teo, Chung-Piaw, Judgment Error in Lottery Play: When the Hot-Hand Meets the Gambler’s Fallacy (October 3, 2018). Stanford University Graduate School of Business Research Paper No. 2703474. Available at SSRN: https://ssrn.com/abstract=2703474 or http://dx.doi.org/10.2139/ssrn.2703474

Qingxia Kong

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Georg Granic (Contact Author)

University of Antwerp ( email )

Prinsstraat 13
Antwerp, Antwerp 2000
Belgium

HOME PAGE: http://https://www.uantwerpen.be/en/staff/georgdura-granic/

Nicolas S. Lambert

Stanford Graduate School of Business - Knight Management Center ( email )

655 Knight Way
Stanford, CA 94305-7298
United States

Chung-Piaw Teo

NUS Business School - Department of Decision Sciences ( email )

15 Kent Ridge Drive
Mochtar Riady Building, BIZ 1 8-69
119245
Singapore

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