Gambler's Fallacy in Financial Markets "A Case Study on Financial Sector Companies Listed in Damascus Security Exchange"

Abstract

Behavioral finance provided many factors that have effects in the financial markets, and these factors known as "Behavioral Factors", and this study aims to examine one of these factors named "Gambler's Fallacy" through analyzing stock returns. The study starts from the idea that the investor who is affected by gambler's fallacy thinks that the consecutive returns of a stock will be followed by a drop in its price, and this idea forces him to sell rising stocks for consecutive trading sessions without having a scientific explanation for this act. And also, the same goes for the stocks with decreasing returns for number of consecutive trading sessions, the gambler's fallacy will push the investor toward thinking that the prices are going to rise in the next session, so he buys these stocks before the prices get higher. In order to test these hypotheses, an analysis of stock returns for 14 companies listed in Damascus Stock Exchange (DSE) was conducted for a period from 1-1-2011 until 31-12-2019 through calculating the daily abnormal return for each stock, then study the abnormal returns series which have the same sign (positive/negative). The study showed that after several consecutive sessions of the same signed abnormal returns, the abnormal return in the following session will take the opposite sign, and it also showed that this reversal act will be more noticed when the length of the consecutive abnormal returns series is longer, indicating that Gambler's Fallacy factor exists in (DSE).