Hot-hand fallacy

The hot-hand fallacy is a cognitive bias where individuals perceive a series of successes in a sequence of independent events as evidence of a 'hot streak.' Despite each event being random and independent of previous outcomes, people often believe that future success is more likely if one is 'on a roll.' This belief is prevalent in areas such as sports, gambling, and financial investing.

How it works

The hot-hand fallacy occurs when people misinterpret random sequences of outcomes, thinking that past successes increase the chances of future successes. This misconception arises because humans are adept at finding patterns, even in random events, and often attribute causality where there is none. The belief in the hot hand suggests that after several successes, a person is more likely to experience further success, despite each event being independent and having the same probability of occurrence.

Examples

• A basketball player who scores several consecutive shots will be perceived to have a 'hot hand,' leading teammates and spectators to expect continued successful performance.
• A gambler winning several rounds in roulette might believe they are getting 'lucky' and continue to bet heavily expecting the streak to continue.
• In day trading, an investor who makes several profitable trades in a row may be seen as having a 'hot streak,' attracting more investments based on perceived increased skill.

Consequences

Belief in the hot-hand fallacy can lead to overconfidence and poor decision-making. Athletes might overestimate their skills and take riskier shots, gamblers might wager more than prudent, and investors might hold on to overvalued stocks expecting continued success, all of which can lead to significant losses.

Counteracting

To counteract the hot-hand fallacy, individuals should develop an understanding of probability and statistics, emphasizing the independence of random events. Awareness of cognitive biases and adopting a more critical approach to evaluating patterns can help in reducing the impact of this fallacy.

Critiques

Recent studies have challenged the traditional view of the hot-hand fallacy, providing evidence that streaks may have some validity in specific contexts, such as sports, where skill can indeed influence outcomes. Critics argue that dismissing all streaks as fallacious overlooks situations where genuine factors can contribute to a series of successes.

Fields of Impact

Also known as

Relevant Research

• The Hot Hand in Basketball: On the Misperception of Random Sequences.

  Gilovich, T., Vallone, R., & Tversky, A. (1985)

  Cognitive Psychology, 17(3), 295-314

• Surprised by the Gambler’s and Hot Hand Fallacies? A Truth in the Law of Small Numbers.

  Miller, H., & Sanjurjo, A. (2018)

  Econometrica, 86(6), 2019-2047

• ‘Statistics: Learning in the Presence of Variation.’ The Mathematics Teacher, 92(4), 288-290

  Wardrop, R. L. (1999)