Behavioral Finance

Decision-Making Under the Gambler's Fallacy

Topics - Behavioral Finance

${ numberSection } ${ text }
Decision-Making Under the Gambler's Fallacy

Fama-Miller Working Paper

After reviewing the decisionmaking processes of individuals in three high-stakes contexts — refugee asylum courts, loan application review and baseball umpire calls — the authors write that they found strong negative autocorrelation that was unrelated to the quality of cases. That is, the judges, loan officers and umpires made decisions based as much on their own previous decisions as on the facts they ostensibly were weighing.

This negative autocorrelation is stronger among more moderate and less experienced decision-makers, following longer streaks of decisions in one direction, when the current and previous cases share similar characteristics or occur close in time, and when decision-makers face weaker incentives for accuracy.

The authors show that the negative autocorrelation in decision-making is most consistent with the gambler’s fallacy inducing decision-makers to erroneously alternate decisions because they mistakenly believe that streaks of affirmative or negative decisions are unlikely to occur by chance. They contend that their results are unlikely to be driven by potential alternative explanations such as sequential contrast effects, quotas, learning, or preferences to treat two teams fairly.

Beyond the three settings studied, the authors add that the gambler’s fallacy could affect decision-making more broadly. For example, financial auditors, HR interviewers, medical doctors, and policy makers all make sequences of decisions under substantial uncertainty. Our results suggest that inaccurate perceptions of what constitutes a fair process can perversely lead to unfair or incorrect decisions in many situations.

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.