Question

1. Explain why people tend to avoid betting on numbers that have recently won in a lottery, but also may want to buy their tickets from a store where a big-winning ticket has recently been sold.

Answer 1

People tend to avoid betting on numbers that have recently won in a lottery. But they also may want to buy their tickets from a store where a big winning ticket has been recently sold. These two statements are paradoxical in nature. The first statement may be understood by gambler's fallacy effect and the later one may be understood by hot-hand effect.

1. Gambler's fallacy effect:

The gamblers usually expect the numbers which have not been won or the numbers which they anticipate. This effect is also known as the law of averages. This means there are always fifty-fifty chances that each of the event would take place. One of the exmples of gambler's fallacy effect could be the "pick three numbers game" in New Jersey. This game is based on pari-mutuel betting system, which means that the less number of people bet on a number the more will be the payout. Its been observed that, the money which is betted on a particular number falls to a great extent once that particular number is drawn and it takes several months for betting to become normal again on that number.

This effect can also be explained by the psycology which existed in the evolutionary period where it was believed that the sequence of similar probabilities would occur for a period of time and then it will stop and agin occur after a period of time. This was true for the meteorological events like winters, rainy season etc. Although the cycle would depend on certain other circumstances, but it would repeat after some pause.

2. Hot-hand effect:

This effect is based on the assumption that the probability a cricket player would hit a shot on ball following a hit shot rather than on a ball which he missed. This is a contrasting assumption to that of gambler's fallacy effect. There are various studies which show the hot-hand effect. One of the example is that the employees of a company would invest in the shares of their company based on the performance of company's shares in the past. This effect arises when there is uncertainity about how the events would turn out.

Although the assumptios of gambler's fallacy effect and hot-hand effect are contradictory in nature, there are certain events where both the assumptions hold true. One of the events is lottery, where on one hand many lottery buyers would not bet on numbers which are already drawn and on the other hand, they would buy the lotteries from the store where a big winning lottery was sold recently.