Housefull Economics

The Courtesan’s Mistake

Our weekly explainer on economics using lessons from popular culture. In Installment 25, Madhuri Dixit commits the Gambler’s Fallacy.

Sanjay Leela Bhansali movies (the ones that manage to be released!) offer us several impairments. Blindness through opulence, tinnitus through a dozen or more songs, and brain inflammation through otherworldly logic. They sometimes also offer advice in living life badly with economic biases. Take Devdas for instance. There is drama, tragedy — and the Gambler’s Fallacy.

If you recall, Chandramukhi is putting on her makeup when Devdas makes an entry into her dwelling. She turns around with such suave (and effortlessly, superhumanly fast) movement that the mirror shatters from the whiplash of her wet hair. If I were in his place, I’d be like “Holy shit babe!! That Wonder Woman’s got nothing on you.” But Devdas, unmoved, his senses numbed by melancholy, acknowledges only the loss of the mirror.

The philosophical courtesan, equally nonchalantly, anticipates divine reimbursement. In her own words, “Har dukh aane waale sukh ki chitthi hoti hai, aur har nuksaan hone waale fayde ka ishara.” (“Every sorrow is a harbinger of happiness, and every loss an indication of a profit to be had.”) I felt a tinge of sympathy for her as she committed the Gambler’s Fallacy.

The Gambler’s Fallacy (also known as the Monte Carlo Fallacy) is the mistaken belief that a streak of bad luck makes a person due for a lucky break. The origins of this fallacy can be traced back to 1913, when in a game of roulette at the Monte Carlo casino, the ball fell in a black slot 26 times in a row. That night gamblers lost millions, betting that the “black streak” must end and that the ball must fall in red. This is a fallacy because, in reality, the chance that a random event will occur in the future is independent of the frequency of its occurrence in the past.

Look at those people glued to their seats in front of the slot machines at a casino. Each loss makes them believe that they are now closer to that jackpot. What these gamblers don’t understand is that each turn of the slot machine is independent, and each outcome is as random as the previous one.

The Gambler’s Fallacy does not just affect gamblers. It affects you and me. For instance, when flipping a coin, if you have already had 20 heads in a row, you are likely to believe that the coin would show tails in the 21st flip. This is incorrect. The 21st flip is independent of the 20th flip and the chances of both heads and tails are 50 percent each. In the financial markets too, investors commit this mistake and sell their stock when it’s rising (thinking it will come down soon) and buy a stock when it’s on a downward trend (thinking that it will soon go up).

What is more, this fallacy affects not only people expecting the outcome of an event, but also those deciding the outcome of an event. For instance, research has shown that judges deciding on asylum-seeking applications, officers disbursing loans, and baseball umpires all commit Gambler’s Fallacy. Whether or not you get a loan depends on how the applications preceding yours were adjudged. People (decision-makers, in this case) have a bias against deciding the same way in successive cases.

Our biases shape the world around us, which in turn shapes our lives. Speaking of that, I shall now go back to catching up on world events. Reading newspapers sometimes feels like an exercise in despair. I have a growing feeling that the world owes me some good news. Does it?

About the author

Nidhi Gupta

Nidhi Gupta is Head, Post-Graduate Programmes at the Takshashila Institution. She is a graduate of the London School of Economics and Political Science. Her research interests lie in behavioural economics and in origins of public opinion.