Abstract

We investigate how people’s propensity to display the gambler’s fallacy or the hot-hand fallacy varies with their familiarity with the data generating process (DGP). Past research shows that the gambler’s fallacy emerges when the DGP is known, whereas the hot-hand fallacy occurs when the DGP is unknown. The present paper argues that people’s uncertainty about the DGP is subjective, and likely driven by their familiarity with it. People who are unfamiliar with the DGP will probably feel uncertain about it and be likely to display the hot-hand fallacy, whereas people who are familiar with it will likely display the gambler’s fallacy. We test this conjecture using a proprietary dataset from the Dutch Lotto, covering more than six years, 10.9 million chosen number combinations, and 241 thousand players. In line with our hypothesis, we find that inexperienced players tend to select numbers that were previously drawn, whereas experienced players tend to avoid past winning numbers. A comparison of the behavior of men and women demonstrates the importance of this finding for research into individual differences in misperceptions of randomness. As shown in previous studies, we observe that men are more likely than women to display the gambler’s fallacy. However, this gender difference largely disappears when we control for the systematic difference in their familiarity with the DGP.

About the Speaker

Tong Wang is an associate professor at the Institute for Advanced Economic Research, Dongbei University of Finance and Economics. In 2016, she received her PhD in Economics from Erasmus University Rotterdam. Her main research field is behavioral economics, and she uses big data and experimental economics methodology to discover and summarize human cognition and decision-making patterns, to optimize economic models and to design better mechanisms. Specificly, she focuses on human decision making under uncertainty. Her papers have been published in Management Science, European Economic Review, and other journals.