Meaning of Hot Hand
The 'hot hand' is the notion that an individual or entity is more likely to have continued success because one has had a string of successes. For example, if one flipped a (fair) coin and correctly guessed that three times in a row it would land on the heads, it may be said that they have a 'hot hand'. It is also known as 'Hot Hand Fallacy' or Hot Hand Phenomenon.
Hot Hand Conditions Explained
Under hot hand conditions, a person assumes that their chances of predicting which side of the coin will land next are higher than the actual 50%. The same principle acts as the 'cold hand' when there is a sequence of failures.
Although the hot hand feels like it happens all the time, scientific work has shown solely psychological phenomenon to this. However, newer studies do show some support for the hot hand in some sporting events.
The belief in a hot hand is one that is held by many gamblers and investors alike, and psychologists believe in coming from the same source, the representative heuristic.
For example, data show that an investor's decision to buy or sell a mutual fund primarily depends on the fund manager's track record. However, evidence exists that this aspect is highly overrated. It would seem, therefore, that these investors make decisions based on whether or not they feel that the fund managers are "soft" or not.
The hot hand fallacy is the psychological condition that an individual believes to be "hot" or "cold" depending on past performance when that performance has no bearing on future results. Rolling a die, for example, is independent of how you've rolled it in the past.
Support for and against the existence of Hot Hand
New research using modern statistical analysis in some sporting events offers some evidence for the "hot hand". As sports betting gets more popular, it's not unimaginable that investment strategies would crop up directly after a hot hand.
It is not unusual to encounter a successful streak partly driven by momentum while playing gambling, as in investing. The idea of favourable results; however, results from a hot hand is purely a phenomenon. A lot of established biases will emerge once an investor, and possibly a gambler, begins to think they have a hot hand.
