Which hand is hot?
The “hot hand” theory states that a streak of achievement makes one more likely to succeed. If one flipped a fair coin and accurately predicted three heads, they may have a “hot hand.” Under such conditions, a person thinks their probability of guessing the coin’s next side is more excellent than 50%. Repeated failures work as the “cold hand.”
While the hot hand seems to happen often, a scholarly study has proved it psychological. However, recent research supports the hot hand in various sports.
How Hot Hand Works
The notion of a hot hand is common among gamblers and investors, and psychologists attribute it to the representative heuristic. There is evidence that investors buy or sell mutual funds based on the fund manager’s track record, even if this element is overestimated. Such investors apparently base their judgments on whether the fund managers are “hot” or not.
According to the hot hand fallacy, people feel someone is “hot” or “cold” based on previous performance, even though it does not affect future outcomes. For instance, rolling a die is independent of earlier rolls.
Evidence for and Against Hot Hand
As in investing, momentum may drive a winning streak in gambling. However, the concept that a heated hand generates good luck is psychological. Many known biases might occur when an investor or gambler thinks they have a hot hand. Hot hands can cause behavioral gaps such as overconfidence, confirmation bias, the illusion of control, recency bias, and hindsight bias, among other popular market psychology variables.
Recent statistical analysis supports the “hot hand” in sports. The Supreme Court’s May 2018 decision to relax federal restrictions against commercial sports betting in most states legalized the estimated $150 billion in illegal wagers on professional and amateur sports reported annually. As sports betting grows increasingly popular, hot-hand investing methods may emerge.
Conclusion
- The “hot hand” theory holds that a run of achievements makes an individual or institution more likely to succeed.
- Psychologists believe the hot hand is a behavioral economics representative heuristic mistake.
- Still, some studies suggest the hot hand exists in several sports.
