Gambler’s fallacy is a term we often hear. What is it exactly and how does it affect what you do with your money?
It is the belief that future events will be shaped by past events, even when the two have no correlation. A gambler will assume a coin is due to come up heads after flipping a string of tails, but the outcome of the next fair coin flip is completely independent of the last one—the odds are still 50/50!
Coins have no memory.
Investors fall for a version of gambler’s fallacy when they assume things like economic data, quarterly earnings, and politics will dictate the direction of the market when in reality the three often move independent of each other. Randomness is hard to accept, but a fact of life on this planet.
Why? Because human nature likes order. No matter what the law of ......