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

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).

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Correspondence to Michael Kirchler.

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Huber, J., Kirchler, M. & Stöckl, T. The hot hand belief and the gambler’s fallacy in investment decisions under risk. Theory Decis 68, 445–462 (2010). https://doi.org/10.1007/s11238-008-9106-2

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Keywords

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

JEL Classification

  • C91
  • D81
  • G10