The blog is written by authors Glenn Shafer and Valentin Dimitrov, both at Rutgers Business School, Newark, NJ, USA and is published in the journal, Judgment and Decision Making. The blog post relates to their paper titled, “The martingale index: A measure of self-deception in betting and finance”.

Have you ever felt that you were on a “winning streak” only to face a shocking loss later? Whether it’s at the casino table, in the stock market, or in sports betting, we all might occasionally experience the illusion of beating the odds. But are we really doing better, or are we falling into a hidden trap known as “martingaling”?

Martingaling is the practice of increasing your bets precisely when you’re losing, a strategy that often seems to work at first. When it works even a few times, the illusion of consistency tempts gamblers to keep going without regard for the potential of devastating future losses.

Dimitrov and Shafer introduce a new concept—the “martingale index.” It quantifies how much of an investment or betting strategy’s apparent success is due to this hidden risk-taking behavior. The authors demonstrate that many seemingly profitable strategies in the casino, in business, and in day trading carry concealed risks that surface only when a catastrophic loss occurs.

Consider a classic example from the roulette table: a gambler loses and decides to double their bet on the next round, planning to stop when they are ahead. Initially, this system appears effective, because it usually ends with a small, positive net gain. But eventually, with statistical certainty, a series of consecutive losses leads to an enormous loss.

Similar patterns of behavior appear financial markets. Investors often throw additional resources into losing positions, convinced that the downturn is temporary and a recovery imminent. It initially seems rational, especially if short-term reversals occur frequently enough to create an illusion of successful risk management. But it amplifies potential losses and often catches the investor off-guard with a loss too large to recover from.

Dimitrov and Shafer show how institutions that profit from gambling often encourage martingaling. Readers will learn about betting strategies that look deceptively cautious and yet end with martingaling — strategies that 19^th century casinos actually advertised as sure ways to win. Readers not already familiar with investing on margin will learn how margin calls encourage martingaling. And they will learn how financial institutions have increased the opportunities for small investors to bet on margin.

Martingaling is not restricted to the inexperienced. Professional traders and even corporate executives can fall into the martingale trap. The reason is simple: temporary gains convince them they have unique insights or special predictive skills. Humans naturally seek patterns and confirmation of their beliefs, and repeated small successes provide that confirmation. When occasional losses occur, they are often dismissed as anomalies or bad luck rather than signals of a flawed strategy.

Anyone teaches finance should read this paper and incorporate its lessons in their teaching. These lessons can help anyone who invests or gambles understand the mechanics, psychological allure, and inherent danger of martingaling. In today’s world, where sports betting, routlette, and the stock market are all only a click away, this understanding is sorely needed. And the lessons are equally important for finance professionals. If you are a financial advisor, you owe it to your clients to warn them about martingaling. If you are a professional trader or an executive managing corporate investments, awareness of the martingale index can protect you from costly self-deception.