Common Psychological Fallacies on Risk and Probability

  • Tendency to overvalue wagers involving a low probability of a high gain and to undervalue wagers involving a relatively high probability of low gain.
  • Tendency to interpret the probability of successive independent events as additive rather than multiplicative.
  • Belief that after a run of successes, a failure is mathematically inevitable, and vice versa (aka Monte Carlo fallacy).
  • Perception that a favorable event has higher probability over an unfavorable event even though their mathematical probability is the same.
  • Tendency to overestimate the frequency of occurrence of infrequent events and to underestimate that of comparatively frequent ones after observing a series of randomly generated events.
  • Confuse the occurrence of โ€œunusualโ€ events with the occurrence of low-probability events (e.g. getting 13 spades is just as probable as getting any other hand).