Gambling Fallacies Research Articles

Do Psychological Fallacies Influence Trading in Financial Markets? Evidence from the Foreign Exchange Market

ABSTRACTResearch in both economics and psychology suggests that when agents predict the next value of a random series they frequently exhibit two types of biases, which are called the gambler's fallacy (GF) and the hot hand fallacy (HHF). The GF is to expect a negative correlation in a process that is in fact random. The HHF is more or less the opposite of this—to believe that another heads is more likely after a run of heads. The evidence for these fallacies comes largely from situations where they are not punished (lotteries, casinos, and laboratory experiments with random returns). In many real-world situations, such as in financial markets, succumbing to fallacies is costly, which gives an incentive to overcome them. The present study is based on high-frequency data from a market maker in the foreign exchange market. Trading behavior is only partly explained by the rational exploitation of past patterns in the data. There is also evidence of the GF: a tendency to sell the dollar after it has risen persistently or strongly.

Cognitive distortions among older adult gamblers in an Asian context.

AimsThe study aims to describe the construct of cognitive distortions based on the narratives of older adult gamblers (aged 60 years and above) in Singapore.MethodsSingapore residents (citizens or permanent residents) aged 60 years and above, who were current or past regular gamblers were included in the study. Participants were recruited using a combination of venue based approach, referrals from service providers as well as by snowball sampling. In all, 25 in-depth interviews were conducted with older adult gamblers. The six-step thematic network analysis methodology was adopted for data analysis.ResultsThe mean age of the participants was 66.2 years. The majority were male (n = 18), of Chinese ethnicity (n = 16), with a mean age of gambling initiation at 24.5 years. Among older adult gamblers, cognitive distortions emerged as a significant global theme comprising three organizing themes–illusion of control, probability control and interpretive control. The organizing themes comprised nine basic themes: perception of gambling as a skill, near miss, concept of luck, superstitious beliefs, entrapment, gambler’s fallacy, chasing wins, chasing losses, and beliefs that wins are more than losses.ConclusionsCognitive distortions were endorsed by all gamblers in the current study and were shown to play a role in both maintaining and escalating the gambling behaviour. While the surface characteristics of the distortions had a culture-specific appearance, the deeper characteristics of the distortions may in fact be more universal than previously thought. Future research must include longitudinal studies to understand causal relationships between cognitive distortions and gambling as well as the role of culture-specific distortions both in the maintenance and treatment of the disorder.

The Categorical Stability of Gambling Motives Among Community-Recruited Gamblers: A Longitudinal Assessment.

Over the past decade, several motivational models have been proposed to explain the role of motives in gambling disorder. In the model captured by the four-factor Gambling Motives Questionnaire Financial (GMQ-F), gamblers are described as being primarily motivated to gamble for 'coping', 'enhancement', 'social', and 'financial' reasons. Although this model has received significant empirical support; to date, research assessing the role of motives in gambling disorder has been primarily cross-sectional in nature. Thus, the extent to which gambling motives remain stable over time has yet to be explored. In the current study, the stability versus fluidity of self-assessed gambling motives was investigated using the Quinte Longitudinal Study, a longitudinal dataset of gambling behaviour collected over 5years. Gambling motives of 2795 gamblers were examined over all five annual assessments. The total proportion of gamblers who stayed in the same primary motive category across each of the 5 consecutive assessments was 22%, indicating substantial fluidity in category membership. Substantial movement between categories was seen for each GMQ-F group, as well as an additional group of non-classified motives. Logistic regression analyses suggest that greater resistance to gambling fallacies significantly predicted stability between the baseline assessment and a follow-up 1year later, but gambling severity did not. Potential limitations in the study design and opportunities for future research are discussed.

A qualitative examination of factors underlying transitions in problem gambling severity: Findings from the Leisure, Lifestyle, & Lifecycle Project

Background: The current study sought to explore the narrative accounts of individuals who underwent changes in their problem gambling severity, and identify subjective factors underlying these transitions. Additionally, respondents’ perceived change in their gambling behavior was compared with a validated measure of problem gambling severity.Methods: Participants were recruited from The Leisure, Lifestyle, & Lifecycle Project (LLLP), a prospective cohort study based in Alberta, Canada. In-depth, semi-structured telephone interviews were conducted with a subset of participants identified as showing a significant increase or decrease in problem gambling severity between Wave 4 and 5 of the LLLP (n = 41). Principles of phenomenology and grounded theory were used to thematically code interviews.Results: About half of respondents increased in problem gambling severity between Wave 4 and 5 (n = 22), while 19 respondents decreased. For those who perceived this change (n = 13), the most common factors underlying increases in problem gambling severity were the same factors underlying decreases and included financial, social, and internal reasons. More than half of the sample (n = 28) perceived stability in, or a change in their gambling behavior that was incongruent with their problem gambling severity score. These respondents tended to endorse a greater degree of gambling fallacies, dissonant feelings, and mental health issues, compared to those who had accurately perceived their change.Conclusions: The findings suggest that many individuals may not accurately perceive transitions in their gambling. Gambling fallacies and dissonant feelings seem to underlie this discrepancy, highlighting the need for public health initiatives to focus on correcting these erroneous beliefs.

Losses and External Outcomes Interact to Produce the Gambler's Fallacy.

When making serial predictions in a binary decision task, there is a clear tendency to assume that after a series of the same external outcome (e.g., heads in a coin flip), the next outcome will be the opposing one (e.g., tails), even when the outcomes are independent of one another. This so-called “gambler’s fallacy” has been replicated robustly. However, what drives gambler’s fallacy behavior is unclear. Here we demonstrate that a run of the same external outcome by itself does not lead to gambler’s fallacy behavior. However, when a run of external outcomes is accompanied by a concurrent run of failed guesses, gambler’s fallacy behavior is predominant. These results do not depend on how participants’ attention is directed. Thus, it appears that gambler’s fallacy behavior is driven by a combination of an external series of events and a concurrent series of failure experiences.

Who "believes" in the Gambler's Fallacy and why?

Humans possess a remarkable ability to discriminate structure from randomness in the environment. However, this ability appears to be systematically biased. This is nowhere more evident than in the Gambler’s Fallacy (GF)—the mistaken belief that observing an increasingly long sequence of “heads” from an unbiased coin makes the occurrence of “tails” on the next trial ever more likely. Although the GF appears to provide evidence of “cognitive bias,” a recent theoretical account (Hahn & Warren, 2009) has suggested the GF might be understandable if constraints on actual experience of random sources (such as attention and short term memory) are taken into account. Here we test this experiential account by exposing participants to 200 outcomes from a genuinely random (p = .5) Bernoulli process. All participants saw the same overall sequence; however, we manipulated experience across groups such that the sequence was divided into chunks of length 100, 10, or 5. Both before and after the exposure, participants (a) generated random sequences and (b) judged the randomness of presented sequences. In contrast to other accounts in the literature, the experiential account suggests that this manipulation will lead to systematic differences in postexposure behavior. Our data were strongly in line with this prediction and provide support for a general account of randomness perception in which biases are actually apt reflections of environmental statistics under experiential constraints. This suggests that deeper insight into human cognition may be gained if, instead of dismissing apparent biases as failings, we assume humans are rational under constraints.

Evidence for multiple processes contributing to the Perruchet effect: Response priming and associative learning.

The Perruchet effect constitutes a robust demonstration that it is possible to dissociate conditioned responding and expectancy in a random partial reinforcement design across a variety of human associative learning paradigms. This dissociation has been interpreted as providing evidence for multiple processes supporting learning, with expectancy driven by cognitive processes that lead to a Gambler's fallacy, and the pattern of conditioned responding (CRs) the result of an associative learning process. An alternative explanation is that the pattern of CRs is the result of exposure to the unconditioned stimulus (US). In 3 human eyeblink conditioning experiments we examined these competing explanations of the Perruchet effect by employing a differential conditioning design and varying the degree to which the 2 conditioned stimuli (CS) were discriminable. Across all of these experiments there was evidence for a component of the CRs being strongly influenced by recent reinforcement, in a way that was not demonstrably influenced by manipulations of CS discriminability, which suggests a response priming mechanism contributes to the Perruchet effect. However, the complete pattern of results and an analysis of the results from previously published studies are also consistent with there being an associative contribution to the effect. (PsycINFO Database Record

The relationship between gambling fallacies and problem gambling.

The cognitive model of problem gambling posits that erroneous gambling-related fallacies are key in the development and maintenance of problem gambling. However, this contention is based on cross-sectional rather than longitudinal associations between these constructs, and gambling fallacy instruments that may have inflated this associated by their inclusion of problem gambling symptomatology. The current research re-evaluates the relationship between problem gambling and gambling-specific erroneous cognitions in a 5-year longitudinal study of gambling using a psychometrically sound measure of erroneous gambling-related cognitions. The sample used in this study (n = 4,121) was recruited from the general population in Ontario, Canada, and the retention rate over 5 years was exceptionally high (93.9%). The total sample was similar, in age and gender distributions, to the census data at the time of data collection for Canadian adults (18-24 years, n = 265, 55.8% female; 25-44 years, n = 1,667, 56.4% female; 45-64 years, n = 1,731, 55.4% female; 65 + years, n = 458, 44.75% female). Results of both cross-sectional and longitudinal analyses confirm that gambling-specific fallacies appear to be etiologically related to the subsequent appearance of problem gambling, but to a weaker degree than previously presumed, and in a bidirectional manner. (PsycINFO Database Record

The role of behavioral finance in modern age investment

Decision making process is very complex task that involves various activities like industry and company analysis along with analysis of past performance of individual stocks/assets. Asunder from this, one of the most important factors that influence the individual's investment decision is cognitive illusions. Individual investor‘s behavior is influenced by various heuristic and biases, which are brought to light by the emerging field of behavioral finance. This paper provides aconceptual framework of the various principles of Behavioral Finance including cognitive illusion: Heuristics, Overconfidence, Representativeness, Anchoring, Gambler's Fallacy,Prospect Theory, Loss Aversion, Regret Aversion, Mental Accounting and Disposition Effect.

Gambler's fallacy and imperfect best response in legislative bargaining

We investigate the implications of imperfect best response—in combination with different assumptions about correct (QRE) or incorrect beliefs (Quantal-Gambler's Fallacy or QGF)—in the alternating offer multilateral bargaining game. We prove that a QRE of this game exists and characterize the unique solution to the proposer's problem—that is, the proposal observed most frequently in a QRE. We structurally estimate this model on data from laboratory experiments, and show that it explains behavior better than the model with perfect best response: receivers vote probabilistically; proposers allocate resources mostly within a minimum winning coalition of legislators but do not fully exploit their bargaining power. Incorporating history-dependent beliefs about the future distribution of proposal power into the QRE model (QGF) leads to an even better match with the data, as this model implies slightly lower shares to the proposer, maintaining similar or higher frequencies of minimum winning coalitions and similar voting behavior.

Availability Heuristic and Gambler's Fallacy over Time in a Natural Disaster Insurance Choice Setting

We carry out a repeated game of demand for typhoon insurance in China to study how the availability heuristic and gambler’s fallacy affect that demand in both short term and long terms. We find that after people experience the first typhoon in the experiment, the availability heuristic dominates their demand for insurance in the short term. Those who experience additional typhoons are more strongly influenced by the gambler’s fallacy though. Females are more likely to be susceptible to the availability heuristic and males to the gambler’s fallacy. We also compared our findings to those of Kunreuther and Michel-Kerjan (2015) in the U.S. and found that respondents from both nations exhibit similar behavioral pattern, except that Chinese seem more susceptible to the influence of availability heuristic. Our analysis reveals that the market fluctuation caused by availability heuristic and gambler’s fallacy is a short term phenomenon. Measures to mediate short-term fluctuations are discussed.

Cognitive distortions predict future gambling involvement

Disordered gambling is best conceptualized as a continuum of severity. Previous research has demonstrated the utility of studying individuals at all points of this spectrum. The sequence of the development of gambling problems and change in gambling involvement along this continuum of severity is not well understood. The present study examined the interplay between cognitive distortions and gambling involvement in a population sample recruited in Alberta, Canada. Data from 1372 participants over 4 assessment waves (5 years) were used to generate a 2-factor latent structure using gambling fallacies and gambling involvement measurements. Structural equation modelling showed that cognitive distortions more strongly predicted future gambling involvement than the reverse relationship, using the comparative fit index (CFI) and the root mean square error of approximation (RMSEA) to assess the models. In addition, cognitive distortions declined over time, whereas gambling involvement remained stable. The results of the study suggest that focusing primarily on cognitive mechanisms in public health initiatives for gambling disorders may be a more effective strategy than focusing on behavioural solutions.

The interaction of perceived control and Gambler's fallacy in risky decision making: An fMRI study.

Limited recent evidence implicates the anterior/posterior cingulate (ACC/PCC) and lateral prefrontal networks as the neural substrates of risky decision-making biases such as illusions of control (IoC) and gambler's fallacy (GF). However, investigation is lacking on the dynamic interactive effect of those biases during decision making. Employing a card-guessing game that independently manipulates trial-by-trial perceived control and gamble outcome among 29 healthy female participants, we observed both IoC- and GF-type behaviors, as well as an interactive effect of previous control and previous outcome, with GF-type behaviors only following computer-selected, but not self-selected, outcomes. Imaging results implicated the ACC and left dorsolateral prefrontal cortex (DLPFC) in agency processing, and the cerebellum and right DLPFC in previous outcome processing, in accordance with past literature. Critically, the right inferior parietal lobule (IPL) exhibited significant betting-related activities to the interaction of previous control and previous outcome, showing more positive signals to previous computer-selected winning versus losing outcomes but the reverse pattern following self-selected outcomes, as well as responding to the interactive effect of control and outcome during feedback. Associations were also found between participants' behavioral sensitivity to the interactive effect of previous control and previous outcome, and right IPL signals, as well as its functional connectivity with neural networks implicated in agency and previous outcome processing. We propose that the right IPL provides the neural substrate for the interaction of perceived control and GF, through coordinating activities in the anterior and posterior cingulate cortices and working conjunctively with lateral PFC and other parietal networks.

Implications of Heuristics in Financial Decision Making

Rationality is the only factor that differentiates us as ‘Homo Economicus’ from Homo sapiens. It is on which theories and concepts of economics and finance are built upon. Neo classical economics stresses that people are rational in making decisions. That is why rational preferences are assumed to be complete and transitive. Most important foundation work on this aspect ‘expected utility theory’ was developed by John Van Neuman and Oskar Mor Genstern in 1944 gives a conceptual framework of how people should act in making decisions. But empirical evidences have proved that people are not always rational in considering all the available information of an opportunity before deciding on it. After all, theory is a way to explain an observation. The most important breakthrough came in the year 1979 from Daniel Kahneman and Amos Tversky, who came out with a theory opposite to expected utility theory, called ‘Prospect Theory’. Prospect theory's ‘value function’ is analogues to utility function of expected utility theory. Another key building block of prospect theory is the use of decision weights rather than probabilities. Practically, it is not possible to have a decision maker with unlimited cerebral RAM, who would consider all relevant information and come up with a choice under all circumstances. Ease of processing and information overloaded leads to Heuristics or Shortcuts. There are two types of heuristics. Type 1 is autonomic, non cognitive, economize on effort and Type 2 is purely cognitive in nature. In a series of articles Daniel Kahneman and Amos Tversky identified three key heuristics named Representativeness, Availability, Anchoring. This paper studies the impact of demographic variables in determining these heuristics and also the level of impact of heuristics on investment performance. In addition to the three heuristic variables mentioned overconfidence and Gambler's fallacy are also included in the study. Data are collected through questionnaires. The collected data then analyzed using statistical tools like ANOVA and Regression to know the relationship and impact of the Heuristics

Characteristics of Good Poker Players

Poker is characterized as a “mixed” game: a game that includes both skill and chance components. But what individual differences are characteristic of skilled poker players? No previous study has sought to evaluate the full scope of characteristics contributing to playing skill. The purpose of this study was to fill this void by attempting to comprehensively examining the individual characteristics associated with good poker players. Results from a sample of undergraduate students and community members (n = 100) showed that good players are more likely to be male, to have lower susceptibility to gambling fallacies, a greater tolerance for financial risk, superior social information processing skills, and less openness to aesthetic and imaginative experience. Evidence from this study also indicates that having sufficient levels of most of these attributes is more important for poker success than having exceptional strength in just one or two of these areas.

Culture and gambling fallacies.

Euro-Canadians and Chinese typically hold different theories about change; Euro-Canadians often engage in linear thinking whereas Chinese often engage in non-linear thinking. The present research investigated the effects of culture-specific theories of change in two related gambling fallacies: the gambler’s fallacy (GF; the belief that one is due for a win after a run of losses) and the hot-hand fallacy (HHF; the belief that one’s winning streak is likely to continue). In Study 1, participants predicted the outcome of a coin toss following a sequence of tosses. Study 2 involved predicting and betting on the outcome of a basketball player’s shot following a sequence of shots. In Study 1, Asians (mainly Chinese) were significantly more likely than Euro-Canadians to believe that they would win (correctly predict the coin toss) after a series of losses (a non-linear thinking pattern), suggesting greater susceptibility to the gambler’s fallacy. In Study 2, Euro-Canadians were more likely than Chinese to predict outcomes consistent with a basketball player’s streaks (a linear thinking pattern), suggesting greater susceptibility to the hot hand fallacy. By illustrating the role of cultural differences in cognition, these findings contribute to our understanding of why certain cultural groups, such as Chinese, are more susceptible to gambling.

Hot hand and gambler's fallacy in teams: Evidence from investment experiments

In laboratory experiments we explore the effects of communication and group decision making on investment behavior and on subjects’ proneness to behavioral biases. Most importantly, we show that communication and group decision making do not impact subjects’ overall proneness to the hot hand fallacy and to the gambler's fallacy. However, groups decide differently than individuals, as they rely significantly less on useless outside advice from “experts” and choose the risk-free option less frequently. Furthermore we document gender differences in investment behavior: groups of two female subjects choose the risk-free investment more often and are marginally more prone to the hot hand fallacy than groups of two male subjects.

Extending the two faces of subjective randomness: From the gambler's and hot-hand fallacies toward a hierarchy of binary sequence perception.

In this study, we examined perceptions of binary sequences under uncertainty in an attempt to depict a holistic and unifying framework. The first experiment applied a projection method that motivated participants to observe binary series and provide descriptions of their possible underlying mechanisms or processes. This procedure revealed four distinct perceptual categories: two previously studied categories of chance mechanisms and human performance, associated with the gambler's and hot-hand fallacies, and two newly identified categories-periods and processes and traits and preferences. The next three experiments tested the associations between the four categories and the alternation rates of the observed sequences under three categorical decisions structures: screening, discrimination, and classification. The results reveal the relativity of binary sequence perception. They show that the categories of chance mechanisms and periods and processes reflected rather stable perception across all tested conditions, whereas the other two categories were more susceptible to the context in which they were embedded. The findings support previous research on the gambler's fallacy and show that the hot-hand fallacy is confined to comparisons of human performance and chance mechanisms. A proposed developmental hierarchy suggests that all four categories embody basic cognitive structures that assist in detecting, decoding, and interpreting both inanimate and social aspects of the environment.

Latent structure in random sequences drives neural learning toward a rational bias

People generally fail to produce random sequences by overusing alternating patterns and avoiding repeating ones-the gambler's fallacy bias. We can explain the neural basis of this bias in terms of a biologically motivated neural model that learns from errors in predicting what will happen next. Through mere exposure to random sequences over time, the model naturally develops a representation that is biased toward alternation, because of its sensitivity to some surprisingly rich statistical structure that emerges in these random sequences. Furthermore, the model directly produces the best-fitting bias-gain parameter for an existing Bayesian model, by which we obtain an accurate fit to the human data in random sequence production. These results show that our seemingly irrational, biased view of randomness can be understood instead as the perfectly reasonable response of an effective learning mechanism to subtle statistical structure embedded in random sequences.

SELLING TO BIASED BELIEVERS: STRATEGIES OF ONLINE LOTTERY TICKET VENDORS

We provide evidence that sellers respond to buyers' belief biases in a collective lottery betting market, by adopting sales strategies which cater to believers in the Hot Hand and Gambler's Fallacies. Lottery players on the buyer side tend to avoid buying tickets which are similar to the previous winning ticket, in accordance with the Gambler's Fallacy (Clotfelter and Cook 1993; Terrell 1994). At the same time, buyers tend to prefer purchasing tickets from previously winning sellers, despite the fully random nature of wins, in accordance with Hot‐Hand Fallacy (Croson and Sundali 2005). These behavioral biases provide an opportunity for ticket sellers to increase their expected profits by adjusting features of the lottery portfolios they sell. We find that sellers make changes to their portfolio size, commission rate, self‐purchase rate, and number choices in response to previous events, in ways that are consistent with responding to the Hot‐Hand Fallacy belief, and which also lend a degree of support for responding to the Gambler's Fallacy belief. Our results show evidence of participants in a market accommodating their choices to the biased beliefs of other participants in order to gain an advantage in expected profits. (JEL D01, D03, D81, L86)