2010 AM Exam, Q2.C. : gambler's fallacy

[alta168]

In 2010 AM Exam, Q2.C.
Expain how Stewart exhibits each of the following behavioral biases : i. gambler’s fallacy
I don’t remember this term (gambler’s fallacy) appeared in the CFA L3 curriculum. Anyone can advise where it is located ?

 

[mcap11]

i dont recall that term and it is not in the cfai index……..perhaps it was in the old texts?

 

[alta168]

mcap11 Wrote:
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> i dont recall that term and it is not in the cfai index……..perhaps it was in the old texts?
Some questions out of the scope of the L3 curriculum were tested from time to time !

 

[bayofpigs]

This concept is in the behavioral finance section under heuristics. They give an example of it under the subcategory representation i believe.

 

[thommo77]

it is under heuristics in the CFA text

 

[chrisA]

it is in the text
in general it means that individual beleive that what currently happened is not the usual. i.e certian events are now due and will reverse

 

[thommo77]

gamblers fallacy means that if there have been seven heads, the next flip has to be a tail because we have had seven heads in a row. Not true.
Relating this to the financial markets, if the market has been down for eights months in a row, we should plow money in because the next month has to be an up month. Not true.
You get the point.

 

[Jose G]

Gambler’s fallacy is also known as the “law of small numbers”, the mistaken notion that the law of averages (law of large numbers) applies to small samples, when it is valid only for large samples.
It’s explained on CFAI vol. 2, pages 8-9