Is the Gambler's Fallacy Really a Fallacy?
9 Pages Posted: 15 Nov 2006
Date Written: November 13, 2006
This paper suggests that the behavior characterized as the gambler's fallacy can be rational, even though it appears to be contradicted by theory. It suggests that a gambler exhibiting this behavior may not be increasing a wager in response to a fallacious increased conditional probability of a marginal outcome occurring in a series of wagering opportunities (events), but instead wagering on the correct probability of a series of outcomes occurring. The gambler might simply be constrained by the mechanics of the game to bet on a series by making a wager on the marginal event. A simulation shows that such behavior is rational because it results in positive winnings, even though the theoretical gain from a gambler's fallacy perspective is $0. This motive is similar to the motive behind the behavior associated with the St. Petersburg paradox. Both are linked to the concept of luck.
Keywords: gambling, gambler's fallacy, St. Petersburg paradox
JEL Classification: D81
Suggested Citation: Suggested Citation