Volume : IV, Issue : X, October - 2014

Gamblers Fallacy And Its Role In Portfolio Allocation Decisions: An Experimental Study

Sanjana Kadyan, Lavanya Lal, Nisha Khorwal, Medha Sinha

Abstract :

Human beings are often prone to several cognitive and behavioral biases that are not recognized by conventional theory. This study examines the role of Gambler’s Fallacy and Trend Chasing (Hot Hand Fallacy) in influencing the decisions taken by participants with the help of two experiments. In the first experiment, the subjects were asked to predict the outcome of a coin toss after observing the results of the previous seven outcomes of the coin toss. The second experiment was devised to test for the role of Gambler’s fallacy and Trend chasing in portfolio decisions made by the subjects. The participants were allocated 2 perfectly negatively correlated risky assets giving the same dividend. At the beginning of each period, the participants could trade the stocks with the experimenter at no additional cost due to the fixed selling (and purchasing) price. So the participants could eliminate all risk and maximize their expected payoffs by simply keeping a balanced portfolio. The results of the first experiment give substantial evidence for the committal of Gambler’s Fallacy. The second experiment results showed that people held imbalanced portfolios but did not provide us with a clear trend of Gambler’s Fallacy or Trend chasing in portfolio allocation decisions, given the small sample size and budget constraint of this pilot experiment. Improvisations in the experimental design, sample size and salience could give more robust results.

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Article: Download PDF   DOI : 10.36106/ijar  

Cite This Article:

Sanjana Kadyan Gambler’s Fallacy And Its Role In Portfolio Allocation Decisions: An Experimental Study Indian Journal of Applied Research, Vol.4, Issue : 10 October 2014

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