If you talk to any dedicated pokies player, they’re likely tell you the same thing: they can “feel” when a machine is about to pay out. The same thing is true of day traders. Many will swear they’ve found a pattern in stock charts that’s going to be instrumental in their hitting it big.
Both are experiencing the illusion of control, mistaking randomness for skill. Gaming venue mechanics operate on this same principle. Gaming venues make money by exploiting the psychological vulnerabilities that also plague investors. They make someone feel there’s pattern recognition in mindless noise and that hot streaks exist. Loss aversion and sunk cost fallacy also come into play.
Gaming venues are laboratories for studying and understanding human irrationality, and many of the same principles apply to investment decisions.
What Leads Random Events to Feel Like Skill
Gaming venues were designed to create the illusion of control through meaningless choices. Players feel they’re “stopping” the reels on slot machines when, in actuality, the outcome of each spin was already determined. Poker machines are the same way. They offer “hold” buttons that don’t actually change your odds.
The same laws govern roulette wheels. A player might develop a “system” that feels strategic, but it will never overcome the edge the venue enjoys. In short, making choices, even irrelevant ones, makes players feel skillful, even if that’s never really the case.
The Parallel Between Gaming and Investing
Like gaming venue players, traders who routinely make dozens of trades believe activity equals control. They constantly check their portfolios, adjust their positions, and follow elaborate “systems” that they’re certain influence outcomes.
In reality, most stock-picking systems don’t outperform index funds, and frequent trading reduces returns due to fees, taxes, and poor timing. While the feeling of “doing something” satisfies a psychological need, it often hurts investors.
Langer’s Illusion of Control Study
This ties directly into E.J. Langer’s famous 1975 paper, “The Illusion of Control.” Langer showed that people act in ways that demonstrate they hold false beliefs about their ability to control the outcomes of chance-determined games.
Just as players seek out high payout casinos on NZCasino, believing they can find an edge, investors chase “hot” stocks or sectors, thinking their skill can overcome randomness. Both overestimate their control over probabilistic outcomes, though neither likes to acknowledge it.
Lottery players choosing their own numbers vs. quick picks and investors picking stocks vs. index funds demonstrate this same pattern. Both groups feel they’re exercising more control over potential outcomes, even though neither actually has it.
The Hot Hand Fallacy and What It Signifies
Humans love seeking patterns in random events. In gaming venues, this is demonstrated by pokie players who hit three wins in a row and come to believe that a machine is “hot.” Following this logic, they’re certain to keep playing at that machine.
Meanwhile, a table game player on a winning streak will tell you they’re “in the zone.” This is the hot-hand fallacy, in which belief in past success is used to predict future success in random or independent events.
When Playing the Market Mimics This Fallacy
Investors chase “momentum stocks” in a similar manner. Their logic can be as simple as seeing that a stock is up 50% in a given month, so they believe it will keep increasing.
They’ll pour money into recent winners, such as tech stocks in late 1999 or crypto in 2021. Others might follow “hot” fund managers whose recent success is often luck rather than skill. IPO crazes are frequently driven by this type of “hot hand” thinking.
The psychology behind the mindset is simple. Pattern recognition in humans evolved to spot real patterns, such as the yearly cycle of seasons or animal behavior. Where this evolutionary trait misfires, randomness is regarded as pattern recognition.
There’s also a related gambler’s fallacy where the exact opposite belief is held. In such instances, a player will believe they’re “due for a win.” Just like the hot-hand fallacy, this type of thinking stems from seeing meaning where none exists.
Gaming Venues and Markets Prey on the Unwary
Though most gamblers and day traders won’t admit this, losses hurt more than equivalent gains feel good. This can lead to chasing one’s losses, a concept pokie players and market speculators will easily recognize.
Consider this type of gaming venue exploitation. A pokie player might lose $100 and win back $30. They’ll feel relief at that moment and keep playing to “break even.”
Near-misses, like two cherries and one lemon, are designed to make players feel they “almost won” rather than lost. Regular players are likely to stay at the tables or machines trying to recover their losses instead of calling it a day and walking away.
The Same Mentality Can Hurt Investors
There’s an obvious investor parallel to this behavior. A frequent trader might hold onto a losing stock because selling “locks in the loss.” In reality, the loss already happened when the price dropped. The sale just recognizes it.
Averaging down on losing positions because “it’s cheaper now,” or refusing to sell stocks at a loss while celebrating small gains, are other typical trader behaviors. This aligns with Kahneman and Tversky’s prospect theory from 1979. This established that people are risk-averse with gains but risk-seeking with losses. In other words, losses hurt more than gains satisfy.
The Sunk Cost Fallacy Overlap
Imagine someone saying, “I’ve already lost $500 on this stock, so I can’t sell now.” It’s the same as a casino player telling you, “I’ve already put $200 in this slot machine, so let me try just one more spin.” In both situations, the subject is letting the money already gone influence their future decisions.
Many investors held Enron, Lehman, or FTX till they became worthless, refusing to accept the reality of their losses. Doubling down on failing trades shows this same mindset. This can be compared to gamblers who enter a casino with $100, lose it all, and then hit the nearest ATM, intent on recouping their initial losses.
Both gaming venues and brokers make it easy to get in and psychologically difficult to get out. There are seldom “you’ve been here three hours” warnings at gaming venues or “this position is down 40%” alerts for traders.
Near Misses Can Wreak Havoc on the Psyche
Gaming venues and markets are designed to give you that “almost” feeling. In gaming venues, pokies are intentionally programmed to show jackpot symbols just above or below the payline. Poker machines frequently show that you’re one card away from a flush. This leads to the “I almost had it, next time I’ll get it” mindset.
The market version of this is when a stock you researched hits your price target, only to quickly reverse. Few investors sell off at just the right moment.
Options might expire a day before a stock moves in your direction. A crypto surge can happen a week after you sold. These near-misses reinforce the belief that you were “right” but simply mistimed your strategy. Most traders can’t resist another attempt.
Confirmation Bias Amplification
Both gamblers and investors remember their biggest near-misses and wins while forgetting the routine losses that hurt them in the long run. Selective memory creates a false sense of confidence.
Investors remember their stock pick that quickly tripled, purely by luck, while forgetting about the other five that halved. Gaming venues exploit this, as the average player remembers the occasional $500 jackpot much more than the $2000 they fed into the pokies before they won it.
You might know several investors who “called” the 2008 crash but lost money anyway because their “timing was slightly off,” or perhaps the crypto trader who correctly predicted Bitcoin’s rise but sold just a little prematurely. Each near-miss encourages repeat attempts to strike it rich, even though it’s statistically improbable.
Tread Carefully
While it’s certainly possible to make money through the stock market or hit that once-in-a-lifetime progressive jackpot at your favorite gaming venue, the odds don’t favor you.
The illusion of control can be your worst enemy, so be aware of the psychological manipulation both gaming venues and markets engage in. When human psychology can be weaponized against you, it’s your bank account that’s most in danger.
