The Dice Have No Memory
By Doug Utberg
In the casino game of craps, two six-sided dice are thrown multiple times, and players place bets on which numbers will (or will not) be thrown. Craps players are fond of saying that the dice ‘have no memory,’ meaning that you cannot tell what the next roll of the dice will be based on the last roll. Any statistician will tell you that this observation is 100% accurate, since the casino puts multiple measures in place to ensure that the flight trajectory of the dice are random each time they are thrown. Thus, long strings of winning numbers aren’t necessarily the result of a ‘hot’ table… rather they are the result of random probabilities lining up such that the dice result in many consecutive wins.
While this sounds logical enough at first, many gamblers will also tell you elaborate stories of getting caught up in the excitement of a ‘hot table’ where many people are winning in rapid succession. In this case, the emotional side of our brain that believes in a ‘hot table’ (or ‘hot market’) overrides the logical side of our brain that tells us that repeated trials in the casino (or financial markets) are independent… meaning that the next trial is not influenced by the last trial. While this characteristic holds true for both financial markets and casino games, superstition will always factor into both types of activity. (Many craps players take their bets down whenever a player throws the dice off the table, based on the belief that the reviled ’seven’ will show up on the next throw)
The important point this phenomenon illustrates is that it can be very easy to get caught up in the momentum of a ‘hot market’ or ‘hot table,’ but in both cases our fortunes can turn very quickly. It wasn’t all that long ago when people were arguing that real estate values could never go down, and that it was a good investment at any price… or that there was a ‘new economy’ and stock prices would go up indefinitely. In all market situations, it is drastically important to remember that all bubbles eventually pop, trees don’t grow to the sky, and the dice truly have no memory.
Sincere Thanks,
Douglas J Utberg, MBA
Founder – Business of Life LLC
http://www.businessoflifellc.com/
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