Texas Sharpshooter Fallacy – Definition

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Texas Sharpshooter Fallacy Definition

The Texas Sharpshooter Fallacy, commonly known as a clustering illusion, refers to the human tendency to analyze outcomes consisting of clusters in a random sequence of events as non-random. In simpler terms, it is the human tendency to ‘see’ or even look for patterns in outcomes that are completely random. The Texas Sharpshooter Fallacy is sometimes also known as the hot hand fallacy, and is marked by a complete disregard for the element of randomness as well as an overemphasis on the similarities between events, rather than the dissimilarities. In the field of behavioral finance, “clustering illusion“ is the term used for the tendency of investors to see trends in random events occurring in clusters — an illusion that often leads to poor financial and investing decisions.

A Little More on Texas Sharpshooter Fallacy

We, as humans, are naturally inclined to carve order out of chaos, while conveniently disregarding or underpredicting variability in small samples of random data. This inclination can mostly be attributed to the propensity of the human brain for pattern-recognition — a cognitive process that is crucial for identifying spatial relations, remembering findings, and detecting resources as well as hazards.

However, the same ‘gift’ can also create an undesirable bias in the human mind, resulting in a substantial impairment of its decision-making ability. Such cognitive biases have manifested themselves in the form of poor decisions during sporting events, in the battlefield, and even during recreational activities such as gambling. In fact, the term hot hand fallacy owes its origin to the irrational belief held by basketball players, coaches and even commentators that players with a “hot hand”, i.e. players on a scoring streak were much more likely to keep scoring in further attempts. Instances of the Texas Sharpshooter Fallacy were evident during World War II when people saw patterns in the manner in which bombs were dropped over areas — it was analyzed that bombs were being targeted at and dropped in specific areas, when, in reality, it was just a random distribution.

The Texas Sharpshooter Fallacy derives its name from a joke about a Texan who fires a volley of gunshots at the side of a barn and then paints a target centered on the tightest cluster of hits. The Texan’s subsequent claims of being a sublime sharpshooter finds ready acceptance among “outsiders” who were not present at the time of the event, but base their conclusions (about the genius of the sharpshooter) on the clusters of bullet holes dotting the painted target which, they assume, was intentional.

Although originally intended as a joke, the Texas sharpshooter fallacy is able to intricately explain how human nature lends itself to completely ignore randomness when determining the validity of results. Several poor financial and investment decisions have been attributed to this fallacy — many a time, investors wrongly evaluate portfolio managers by only focusing on trades and strategies that the managers got right, while conveniently disregarding the trades and strategies in which they faltered. Similarly, an entrepreneur who is responsible for a few successful businesses along with several failed ones may still promote himself as successful. It is also quite possible for observers to disregard his failures and accept him as being more successful than he actually is.

The Texas Sharpshooter Fallacy vs. Other Logical Fallacies

There are several logical fallacies that are analogous to the Texas Sharpshooter Fallacy. We describe these in brief below.

  • The Gambler’s Fallacy: Also known as the Monte Carlo Fallacy or the fallacy of statistics, the Gambler’s Fallacy refers to the human tendency to believe that a random process becomes less random, and thus, more predictable, the more it is repeated. A gambler that has been consistently failing to get a particular number after several rolls of the dice during a game of craps may hold the irrational belief that the dice are somehow “due” to show his preferred number in subsequent rolls. This is obviously a false cause since every roll of the dice is a random event and its outcome is independent of previous outcomes. In finance, the Gambler’s Fallacy is noticeable when investors assume that the probability of a share increasing or decreasing in price depends on its past performance. For example, let us assume that an investor tracking share prices of a particular company observes consistent high returns over a period of time. Now, although the high return outcomes are completely random, the investor may be led to believe that the stock price is somehow due for a decline after the initial phase of lucrative returns. As such, the investor would most likely decide to book profits or sell his shares altogether.
  • The Broken Window Fallacy: The Broken Window Fallacy (sometimes also referred to as the glazier’s fallacy) derives its name from the parable of the broken window, a logical fallacy introduced by the 19th century French economist, Claude-Frédéric Bastiat. The parable goes as follows — Suppose a child accidentally smashes a glass window pane, necessitating repair or replacement. Since the ensuing economic activities surrounding the repair or replacement of the window pane have benefited the glazier, Bastiat asks if destruction is actually good for the economy. The economist then proceeds to answer his own question by mentioning that since the glazier will have to be paid out of the disposable income of the child’s father, it should be considered a maintenance cost which does not stimulate production. As such, the whole argument about destruction benefiting the economy is a logical fallacy.

References for “Texas Sharpshooter Fallacy

https://www.investopedia.com › Insights › Buzz & Trending

https://en.wikipedia.org/wiki/Clustering_illusion

https://corporatefinanceinstitute.com › Resources › Knowledge › Other

https://rationalwiki.org/wiki/Clustering_illusion

https://smallbusinessforum.co/the-clustering-illusion-6e9c28bff682

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