Events

Dr. Matthew Levy
Lecturer in Economics
Department of Economics
London School of Economics

This paper shows that, under modest consistency requirements placed on a decision-maker’s beliefs, distortion of subjective beliefs over the conditional distributions of outcomes cannot be global over all sequences. Specifically, while it is possible for a decision-maker to commit the Gambler’s Fallacy (or Hot-hand Fallacy) over multiple independent sequences, it is always possible to construct a data-generating process consisting only of i.i.d. processes with at least one sequence over which the decision-maker is unbiased in all histories of arbitrary length. This further implies that if the decision-maker does distinguish between histories of i.i.d. sequences, then they cannot commit the Gambler’s Fallacy at all. A simple experiment demonstrates that subjects indeed do not treat all i.i.d. sequences identically, and highlights the importance of framing in creating and maintaining belief in the Gambler’s Fallacy.