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James Sogi

01/25/04
Gamblers' Fallacies

From Epstein's "Theory of Gambling and Statistical Logic." Thank goodness we count and study statistics so do not fall prey to these gambler's fallacies in our operations.

1. A tendency to overvalue wagers involving a low probability of a high gain and undervalue wagers involving a relatively high probability of low gain.

2. The tendency to interpret the probability of successive independent events as additive rather than multiplicative.

3. The belief that after a run of successes a failure is inevitable and vice versa. (the Monte Carlo fallacy).

4.The psychological probability of success exceeds the mathematical probability if the event is favorable and conversely. For example where the probability of success in winning the lottery and getting killed in an auto accident may be the same, the former is considered more likely from a personal viewpoint.

5. The prediction of an event cannot be detached from the outcomes of similar events in the past, despite mathematical independence.

6. When a choice is offered between a single large chance and several small chances whose sum is equal to the single chance, the single large chance is preferred when the multiple chances consist of repeated attempts to obtain the winning selection from the same source. however when there is a different source for each of the multiple chances, they are preferred.

7.When a person observes a series of randomly generated events of different kinds with an interest in the frequency with which each kind of event occurs, he tends to over estimate the frequency of occurrence of infrequent events and to underestimate that of comparatively frequent ones. Thus one remembers the 'streaks' in a long series of wins and losses and tends to minimize the number of short term runs.

8. A tendency to overestimate the degree of skill involved in a gambling situation involving both skill and chance.

9 A strong tendency of overvalue the significance of a limited sample selected from a relatively large population.

10. The concept of 'luck" is conceived as a quantity stored in a warehouse to be conserved or depleted. Systems are devised to distribute available "luck" in a fortuitous manner. Objective "luck" is just an illusion of the mind.

11. The sample of "unusual events" confused with that of low probability events.

12. The belief that the gambler's attitude affects the results of a chance event.

James Sogi is a philosopher, Juris Doctor, surfer, trader, investor, musician, black belt, sailor, semi-centenarian. He lives on the mountain in Kona, Hawaii, with his family