Surprised by the Gambler's and Hot Hand Fallacies? A Truth in the Law of Small Numbers

Event Name Surprised by the Gambler's and Hot Hand Fallacies? A Truth in the Law of Small Numbers
Start Date 16th Oct 2015 12:30pm
End Date 16th Oct 2015 2:00pm
Duration 1 hour and 30 minutes
Description

Speaker: Dr Adam Sanjurjo, Assistant Professor, University of Alicante, Spain

Abstract

We find a subtle but substantial bias in a standard measure of the conditional dependence of present outcomes on streaks of past outcomes in sequential data. The underlying mechanism is a form of selection bias, which causes the empirical (conditional) probability to underestimate the true conditional probability of a given outcome, when conditioning on prior outcomes of the same kind. The biased measure has been used prominently in the literature that investigates incorrect beliefs in sequential decision making – most notably the Gambler's Fallacy and the Hot Hand Fallacy. Upon correcting for the bias, the conclusions of some prominent studies in the literature are reversed. The bias also provides a structural explanation of why the belief in the law of small numbers persists, as repeated experience with finite sequences can only reinforce these beliefs, on average.

(Joint with Joshua B. Miller)

Bio

Dr Adam Sanjurjo is originally from Northern California, and went to college at UCSB, where he studied economics and mathematics. After working for two years as a research assistant in the Trading Risk Analysis group of the Board of Governors of the Federal Reserve System, he completed a PhD in Economics at UCSD. Adam's research areas were behavioral/cognitive, experimental, and theory, and his dissertation was about decision making under cognitive load, primarily in the context of multiple attribute search. His most recent research focuses on decision making based on sequential data.

Hosted by the School of Economics and Finance. Tea and coffee will be provided prior to the seminar start, RSVP not required.