Gambler’s Fallacy Biases Sequential Decision-Making: Evidence from Taxi Drivers

We examine sequential decision-making not confounded by quotas, fairness, or contrast effects. The setting is taxi drivers deciding to bid for customer bookings or search for street hails. Bookings yield higher earnings, but are subject to cancellation. Longitudinal analysis of 9.2 million trips reveals a sequence effect: if the previous trip was a booking and cancelled, the next trip was more likely a booking than street hail. The sequence effect is consistent with theories that individuals abide by different mental models of sequences of random events, and that their behavior exhibits reversals. An experiment among 241 drivers provides causal evidence. Only drivers who believed in the gambler’s fallacy exhibited the sequence effect. A simple tutorial explaining the fallacy unwound the effect.

Read the full piece at SSRN.