The Cost of Not Understanding Probability Theory

Misconceptions about probability theory and statistics have major repercussions on society. From seemingly minor things like the excessive sensationalism of some headlines, all the way to the jailing of innocent people based on “statistical evidence”. One of the most common misconceptions is the so called Gambler’s fallacy. Wikipedia defines it as follows:

The gambler’s fallacy, also known as the Monte Carlo fallacy or the fallacy of the maturity of chances, is the belief that if deviations from expected behavior are observed in repeated independent trials of some random process then these deviations are likely to be evened out by opposite deviations in the future.

This definition may seem a bit abstract, so let’s clarify it through a practical example. What’s the probability of flipping a fair coin 10 times in a row and obtaining heads consecutively each time? The answer is:

\displaystyle \mathrm{P(E)} = (\frac{1}{2})^{10} \approx 0.0009766.

This would be very unlikely. How unlikely? One in 1,024 to be exact. So if we’ve just observed the coin appear as heads 9 times in a row, what are the odds that the same coin will land on heads on the 10th toss?

Many people would argue that the chance of this happening is less than one in a thousand, as we just calculated. However, that answer is blatantly wrong. The probability that the 10th fair coin toss is going to come up as heads is still 0.5, because each trial (toss) is statistically independent from those that preceded it. Tossing 9 heads in a row is very unlikely, however once it has happened, it doesn’t influence the outcome of the 10th toss in any way.

People who fall for this fallacy, do so because of a fundamental misunderstanding of how probability works. They combine the probability of past events (irrelevant for independent trials), with that of future events. With the example above, some people would also erroneously conclude that “tails is long due to come up” and as such would think that it’s more likely to occur.

It’s not a difficult theory to understand, but a lot of people make the mistake of confusing probability with sheer luck. Every instance of an event relies on the same probability regardless, whether you’re rolling dice, tossing a coin, or even waiting for buses. If the odds were 5000:1, 4999 events later you’ve still only got a 0.02% chance of the odds going in your favour, the same as the first time the event occurred.

This informal fallacy has contributed to the ruin of many gamblers over the years. A tragic example of what happens when you uphold this way of looking at odds occurs with many who play the game of “Lotto” in Italy, a very popular lottery game played amongst the general population.

The idea behind this game is very simple. Five distinct numbers between 1 and 90 are randomly selected in 10 different Italian cities, three times a week. Gamblers can place several types of bets, but the one we’re interested in, for the sake of this article, is called the “estratto semplice” (simple draw). This type of game requires gamblers to correctly predict that a specific number will be drawn in a particular city.

The probability of placing a winning bet is 1 in 18 (i.e., 5/90), while the payout is 11.232 times the amount that you put down (so if you bet 1 Euro and won, you’d walk away with 11.23 Euros before taxes). The odds are clearly stacked in favor of the house, of course. Incidentally, Lotto is run by the state and is also known as “a tax on the stupid” for rather obvious reasons.

There are many “systems” and theories used by a large pool of gamblers who want to “beat the system”. More often then not such systems are based on some flawed understanding of how probability really works. A very popular theory is that of the “numeri ritardatari” (“late numbers”, as we will refer to them throughout this article). The basic principle behind late numbers is this: since it’s extremely unlikely that a given number will fail to appear at least once out of 150, 180 or 200 draws in a row, in a given city, you can identify what numbers are “due” to appear and thus bet on them. For example, if a number hasn’t been drawn in the past 140 trials, the number of bets on it will start to grow very quickly.

Of course, despite the fact that a number hasn’t come up in a given city 140 times in a row, its probability of occurring on the next draw is still just 1 in 18. So betting any of the other 89 numbers would yield the same probability of winning.

The application of this fallacy becomes extremely dangerous when coupled with Martingale betting systems, which are often adopted by “late number theorists”. The theory they use is very simple. Since they assume these late numbers are “due” very soon, they think they are going to be able to afford to put down double their previous wager on every bet until the number eventually appears. So when it does happen, the last sum they bet is multiplied 11 times (for the payout) and they will recoup all the money they’ve spent up until then, and end up netting a large additional payout, which is the (last wager x 9.232 + 1) Euros.

Martingale betting systems are guaranteed to work provided that the gambler has an infinite amount of capital and no limits are imposed on the maximum bet that’s allowed to be placed. In the real world, both of these requirements cannot be realistically met. The amount bet grows exponentially, so the Martingale system ends up being a surefire way to bankrupt those who employ it.

In the case of the Italian Lotto, both the fallacy that late numbers are “due” and the choice of betting systems (Martingale) are responsible for the ruin of many. The gambler’s fallacy plays an important role in this case because most people realize that they can’t sustain a Martingale type system for 200 consecutive draws. It’s their faith in the idea that late numbers are very likely to pop up soon, that tempts them into toying with this risky system.

If we assume these people are convinced that a very late number (say, one that hadn’t been drawn in the past 180 lottery draws) will be selected at some point during the next 5 weeks or so (15 trials), and that they’re starting with a bet of one Euro, we can see that the maximum amount they’d need to invest (according to their theory) would be 32,768 Euros, with a max bet of 16,384 Euros by the 15th draw. This is a sizable sum of money, but something that some people would still be able to put down, especially because they knew they payout would be 184,025.088 Euros (before taxes). A tempting prize indeed.

But what are the real odds that the number in question, the one that’s been eluding the gamblers, will not end up occurring at least once in the next 15 draws?

\displaystyle \mathrm{P(\overline{E})} = (\frac{17}{18})^{15} \approx 0.4243

So there is a 42.43% risk that the punter will lose their 32,768 Euros, because they won’t have sufficient funds to double their wager at the next turn (assuming 32,768 Euros was the maximum amount they can afford to bet).

Bear in mind that with an exponential growth of the bet, a huge amount of capital will only afford our late number gamblers a few extra draws, thereby only slightly increasing their probability of making a profit. (With a payout of 11.232 times the wager, they could afford a smaller increase in the amount of money they put down draw by draw, but the overall principle remains the same.)

What has an adoption of this faulty theory led to in Italy? What kind of impact has it really had on those who adhere to it? The honest truth is that it’s gone so far as to contribute directly to things like suicides, people swindling their friends and employers, divorces, people betting their life savings and their homes, families being destroyed, and so on. Do such dire consequences occur to everyone who plays this game? No, of course not, but the fact that it’s happened to some people, and that these flawed theories are still employed today, is indicative of the misunderstanding about probability (and the risks of gambling) that occurs in the general population.

One could – and should – argue that such peoples’ demise is due to their gambling habits and to good old fashioned greed, yet I can’t help but feel that a solid understanding of probability theory would go a tremendous way in helping to cut down on the number of people who fall prey to these types of widespread theories.

An increased awareness of probability and statistics can only improve society and its ability to assess situations and make rational decisions. How do we begin to remedy this situation, not only in Italy, but around the world? We can start by devoting far more time in grade, middle and high school math classes, in order to teach students about this important subject and the implications that it can have on their everyday lives, understanding of society, and ability to make wise financial decisions.

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