Flipping a coin seems like a completely random event – but is there actually more psychology involved than we realize? Interesting research has examined how humans behave when asked to predict coin tosses. The results reveal some fascinating insights that may apply to trading decisions as well.
A classic study had participants guess if a coin toss would result in heads or tails. What they found is that instead of choosing randomly, people display clear biases. The tendency is to predict too many alternations between heads and tails, rather than streaks of the same outcome multiple times in a row. People assign meaning and patterns when there are none.
This concept is known as the “hot hand fallacy” – the belief that a streak will continue when the actual odds don’t support it. For example, after 3 heads in a row, the natural inclination is to predict tails next, even though mathematically speaking the odds are still 50/50.
The same psychology applies in financial markets. After a string of winning trades or a period when a trading strategy succeeds, we expect the hot streak to persist. Conversely, a string of losses leads to the assumption that the negative trend will continue. In reality, the outcome of the next trade is just as random as a coin flip.
While trading decisions are certainly more complex than a binary coin flip, understanding the psychology of randomness is key to overcoming bias. A disciplined, probability-based approach removes emotion and irrational expectations from the equation – leading to consistency.
How do you feel about randomness and trading?