Ready to gamble? Good, me too. Ok, just before finishing up this column, I have flipped a coin seven times. Just for you, below I have listed three heads-or-tails sequences. One of these is the exact sequence I flipped (the other two are bogus):

1. H-H-H-H-T-T-T

2. T-H-H-T-H-T-T

3. T-T-T-T-T-T-T

Let’s make a hypothetical bet. You get $100 if you guess the sequence I flipped, and I get $50 if you don’t. On which would you bet?

Thus begins day one in our two-week special series, “The Psychology of Investing.”

Today we discuss the gambler’s fallacy: the incorrect belief that the likelihood of a random event can be affected by or predicted from other, independent events.

Now let’s return to our bet on the coins. On which would you bet?

If you weren’t fooled, you realized that in fact there is no single choice that is better than any other. Each time you flip a coin, the chances are even that it will turn up heads or tails. Thus, the probability of:

T-T-T-T-T-T-T is just the same as T-H-H-T-H-T-T or H-H-H-H-T-T-T.

Given that you win $100 when you win and lose $50 when you lose, you will merely break even over time, repeatedly making this bet.

(However, if I wanted to take your money, I would play a shell game with new bettors each time by putting the metaphorical white bean under shell “C”).

Again, the coin example above makes it perfectly clear that large numbers of people make this error. Our job then is simply to understand why so we may avoid the same mistake ourselves.

What’s really at play here is stereotyping. The act of equating plausibility with probability is exactly what we do when we stereotype things. Our minds say, “Oh, that person is a [insert any subset here], so of course she is [insert adjective here].” We may not explicitly state this; It may lurk in our subconscious. But we rarely recognize that “tails-tails-tails-tails” (as I shall call it) is as equally probable as the more “plausible” or “typical” expectation “heads-tails-heads-tails.”

Turning our focus toward the subject at hand, business and investing, do you find any of your own applications of the gambler’s fallacy? I’d love to hear about it from you. I’ll end with a personal example of the gambler’s fallacy. The best part about hearing ‘no,’ is you’re only that much closer to ‘yes.’ Word.