The hot hand belief and the gambler’s fallacy in investment decisions under risk
- First Online:
- 901 Downloads
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).
KeywordsHot hand belief Gambler’s fallacy Experimental economics Decision making under risk
JEL ClassificationC91 D81 G10
Unable to display preview. Download preview PDF.
- Ayton P., Fischer I. (2004) The hot hand fallacy and the gambler’s fallacy: two faces of subjective randomness?. Memory and Cognition 32: 1369–1378Google Scholar
- Bachelier L. (1900) Théorie de la Spéculation. Gauthier Villars, ParisGoogle Scholar
- Caruso, E. M., & Epley, N. (2004). Hot hands and cool machines: perceived intentionality in the predictions of streaks. Poster session presented at the 5th Annual Meeting of the Society for Personality and Social Psychology, Austin, TX, USA.Google Scholar
- Dohmen, T. J., Falk, A., Huffman, D., Schupp, J., Sunde, U., & Wagner, G. G. (2006). Individual risk attitudes: New evidence from a large, representative, experimentally-validated survey. CEPR Discussion Paper No. 5517.Google Scholar
- Estes W.K. (1964) Probability learning. In: Melton A.W.(eds) Categories of human learning. Academic Press, New York, LondonGoogle Scholar
- Jörgensen, C. B. (2006). Field evidence on the law of small numbers. Working Paper.Google Scholar
- Nickerson R.S. (2004) Cognition and chance: The psychology of probabilistic reasoning. Lawrence Erlbaum Associates Inc, Mahwah, NJGoogle Scholar
- Sundali J., Croson R. (2006) Biases in casino betting: The hot hand and the Gambler’s fallacy. Judgment and Decision Making 1: 1–12Google Scholar