Gambler's Fallacy
The belief that an independent random outcome is due to reverse after a run in one direction.
How it is identified
Test: the predicted probability of the next outcome changes on the basis of prior independent outcomes
Unit
qualitative
In depth
A fair coin that has landed heads six times has exactly a 50% chance of heads on the seventh toss, because the coin has no memory. In markets the fallacy appears as the belief that a stock which has fallen five days running is due to bounce, or that a strategy which has lost several times is due for a win. Market outcomes are not fully independent, which makes the fallacy subtler here than in coin tossing — but the reasoning that a reversal is owed is still wrong. Its opposite, the hot-hand fallacy, assumes runs continue, and both cannot be right about the same series.
Worked example
A trader doubles position size after four consecutive losses, reasoning that a win is due. If the outcomes are independent with a 40% win rate, the fifth trade's probability is 40%, exactly as the first four were.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Gambler's Fallacy” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.