What Is the Hot Hand?
Let me explain the 'hot hand' to you directly: it's the idea that if someone has a run of successes, they're more likely to keep succeeding. For instance, if you correctly guess heads on a fair coin three times in a row, you might think you're on a hot streak and your next guess has better than 50% odds, even though it doesn't. The same goes for failures, which create a 'cold hand.'
You probably feel like this happens often, but academic research shows it's mostly psychological. That said, some newer studies do find evidence for it in specific sports.
Key Takeaways
- The hot hand is the belief that a string of successes makes continued success more likely for an individual or entity.
- Psychologists see it as a fallacy rooted in the representative heuristic from behavioral economics.
- However, research indicates it might be real in certain sporting events.
How the Hot Hand Works
You see this belief in the hot hand among gamblers and investors, and psychologists trace it back to the representative heuristic. Take investors: data shows they often buy or sell mutual funds based on the manager's track record, even though that's overrated. So, they're essentially betting on whether the manager seems 'hot.'
The hot hand fallacy means people judge someone as hot or cold based on past performance, ignoring that it doesn't affect independent future events. Rolling a die, for example, doesn't depend on previous rolls.
Evidence for and Against the Hot Hand
In gambling or investing, you might hit a winning streak that feels like momentum, but the hot hand idea is purely psychological. Once you start believing in it, biases kick in—like overconfidence, confirmation bias, illusion of control, recency bias, and hindsight bias, among others from market psychology.
On the other hand, new statistical research backs the hot hand in some sports. With the Supreme Court's 2018 decision easing laws on sports betting, legalizing billions in wagers, it's likely we'll see investment strategies built around chasing hot hands.
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