Hot Hand

Posted in Finance, Accounting and Economics Terms, Total Reads: 435

Definition: Hot Hand

Hot Hand Fallacy or Hot Hand Phenomenon or Hot Hand all mean the same thing and that is the notion that if a person has a string of successes at a random event, he or she is like to have more continued success in that random event.

This concept can be used in gambling and also some athletic sports like Basketball. The people involved in the conceptualization of this fallacy are Thomas Gilovich , Amos Tversky and Robert Vallone. Their study “The Hot Hand in Basketball: On the Misperception of Random Sequences” done in 1985 investigated the “hot” shooters concept in Basketball.

Let us take an example to make it more clear, suppose a coin is flipped and a person correctly predicts the outcome four times in a row, that person is said to have a “hot Hand” and the person’s odds of guessing the side the next time has increased and his probability is actually more than 50%. The same concept is nowadays applied to investors. If a fund manager is successful in the last three or four attempts, he may have a “hot hand” and investors who want to invest may prefer such fund managers who have “hot hand”. So this concept is very important in financial investing terms, but it could be risky, as these people will take a huge risk the next time they trade and if they fail, which could cause huge amount of loses to too many people. SO “hot Handedness” should not be the only criteria seen by an investor while investing.

Now Gamblers fallacy is a phenomenon that is opposite to “Hot Hand” Concept. Gamblers fallacy assumes that after an event has occurred the next time as reversal of that event will occur and hence gamblers bet on event that is opposite to the event that has occurred.

Taking a recent example of American Basketball, a match between Northwestern and Wisconsin state, Wisconsin state had a “Hot Hand” in 3-pointer shooting and no matter what strategy Northwestern applied; they could not stop the 3-pointers.



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