Having selected five out of five stock winners in the last quarter, the portfolio manager uses the same selection technique this quarter. This is an example of the gambler's fallacy.

Question

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The gambler's fallacy is the belief that a random event is less likely to occur after it has occurred several times in a row. In this case, the portfolio manager is assuming that because they selected five out of five stock winners in the last quarter, they are more likely to select five out of five stock winners in this quarter. However, this is not true. The probability of selecting five out of five stock winners in any given quarter is the same, regardless of what happened in the previous quarter.

Having Selected Five Out of Five Stock Winners in the Last