Article

Theory and Decision

, Volume 68, Issue 4, pp 445-462

First online:

The hot hand belief and the gambler’s fallacy in investment decisions under risk

  • Jürgen HuberAffiliated withDepartment of Banking and Finance, University of Innsbruck
  • , Michael KirchlerAffiliated withDepartment of Banking and Finance, University of Innsbruck Email author 
  • , Thomas StöcklAffiliated withDepartment of Banking and Finance, University of Innsbruck

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Abstract

We conduct experiments to analyze investment behavior in decisions under risk. Subjects can bet on the outcomes of a series of coin tosses themselves, rely on randomized ‘experts’, or choose a risk-free alternative. We observe that subjects who rely on the randomized experts pick those who were successful in the past, showing behavior consistent with the hot hand belief. Obviously the term ‘expert’ suffices to attract some subjects. For those who decide on their own, we find behavior consistent with the gambler’s fallacy, as the frequency of betting on heads (tails) decreases after streaks of heads (tails).

Keywords

Hot hand belief Gambler’s fallacy Experimental economics Decision making under risk

JEL Classification

C91 D81 G10