What is the gambler's fallacy?
People taken in by the gambler's fallacy believe past events affect the probability of something happening in the future. For example, if a coin is tossed and heads comes up 8 times in a row, they'll think that on the 9th time it is more likely to be tails. But the odds are still 50:50 for heads or tails.
Where have you heard about the gambler's fallacy?
It's often referred to when talking about things like a lottery, where the chances of any ball being picked are the same. Some people also apply the same thought process to sports teams or investing.
What you need to know about the gambler's fallacy...
You need to understand that previous events do not always affect current events and judge each situation on its own merits, on every occasion. One of the best ways to do this is to conduct research and analysis and to follow a strategy.
In investing, past performance is not a guarantee of future results. So just because a particular stock has performed well in the past, that doesn't mean it will continue to do so. And just because a stock has been falling for a long time, that doesn't mean a rise is just around the corner. That would be a gambler's fallacy.