Gambler's fallacy

The gambler's fallacy is the mistaken belief that an independent event is due to happen because of what happened recently, even though the two are actually unrelated. The name comes from gambling, where a run of losses at a roulette wheel can create the false sense that a win must be coming soon, even though each spin is statistically independent of the last.

In markets, the fallacy shows up when an investor assumes a stock that has fallen for several days in a row must be about to bounce, or that a stock on a long winning streak is now overdue for a pullback, purely because of the streak itself rather than anything about the company's actual fundamentals or valuation. Daily price moves in an efficient market do not work like a coin that owes you a heads after a run of tails, past moves do not create pressure that makes a reversal more likely.

This is a different mistake from mean reversion, which is a real, documented tendency for certain metrics, like valuations or profit margins, to drift back toward historical averages over long periods for identifiable economic reasons. The gambler's fallacy is the version of this idea applied incorrectly and reflexively, treating a short run of prices as inherently meaningful just because it happened, without any underlying reason to expect a reversal.