Gamblers' Logic
I toss a coin and heads turns up five times in a row.
Which side is more likely to
turn up the next time?
- Heads? Five heads in a row is a pattern - the trend is likely to continue.
- Tails? Six heads in a row is unusual so tails is more likely.
The above answers are examples of gambler's logic — the perception of patterns in random data.
So
which is the correct answer?
Neither - every coin toss has an even chance of turning up heads or
tails. It never varies.
Author: Colin Twiggs is a former investment banker with over 30 years experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary newsletter.
Colin also writes The Patient Investor newsletter which focuses on the global economic outlook and key macro trends.
In addition, he founded PVT Capital (AFSL No. 546090) which offers investment strategy and advice to wholesale clients.