For instance, in a basketball game, if a player makes a couple of successful shots in a row, audiences would tend to believe that “success breeds success,” and “subsequent success is more likely” (Tversky & Gilovich, 1989). Although the hot hand may seem like the simple opposite of gambler’s fallacy, the gambler’s fallacy is the false belief of the random process while the hot hand is the false belief outcomes of the individual. Under the hot hand fallacy, individuals believe that a particular person is “hot” instead of believing that a particular outcome is “hot” (Croson & Sundali, 2005). The two fallacies are similar in that both are false perceptions of non-autocorrelated random sequences, and both involve perceiving random independent events as sequences of outcomes. Therefore, it is possible for an individual to believe in both the gambler’s fallacy and the hot hand. Although the gambler’s fallacy and the hot hand can be applied to a wide range of fields “from gambling to economic decision making and sports,” this paper is going to be centered around investment decisions (Huber, Kirchler, & Stockl, …show more content…
(2010) still considered investing decisions and coin flipping similar enough, so they conducted a study simulating investment decisions using the game of coin flipping to learn more about the effects of the gambler’s fallacy and the hot hand in investing. In this study, the subjects were given the choice of making the decisions themselves, relying on computer randomized “experts”, or a risk-free option. If the subjects chose to make their own decisions and guessed correctly, they earn 100 Taler (game currency), otherwise they lose 50 Taler. If the subjects decide to rely on “experts,” they need to pay an initial charge of 5 Taler and a management fee of 1 Taler. The “experts” claim that they can predict the outcomes, and the option is designed to simulate financial professionals in the real world. In the risk-free option, the subjects are given 10 Taler regardless of the outcomes. This option is designed to mirror risk-free investment alternatives in real financial markets. The subjects were also given relevant information, such as past outcomes and past performance of “experts.” Researchers found evidence for both the gambler’s fallacy and the hot hand in this study. Subjects showed different behavior in the experiment where the choices seemed different but were essentially the same, simply because one choice was labeled with the word “expert”. The participants chose “experts” who they believed were hot, i.e. had good past performance,