Gambler's or the Hot-Hand: Illusion or Real?

Abstract

This paper reviews literature of the Gambler‟s and the hot hand fallacies and the possible differences inherent in explaining investor behaviour. The Gambler‟s fallacy is built on the belief that the more you lose, the higher your next probability of winning in the near future; whereas the hot hand is built on the belief that the more the chances you get right now, the more likely you will get right even in the future. This beliefs are erroneous since they go contrary to the equal chances attributed to the probability of flipping a fair coin according to laws of probability.The investors tend to believe that the performance of a mutual fund is a combination of the manager‟s ability and luck will, at first, underestimate the likelihood that a manager of average ability will exhibit a streak of above- or below-average performance. Both Gamblers‟ and hot hand fallacies are illusions and ideal to a level of factual outcome which remains paradoxical. To a given level of accuracy, the paper based on the existing researches tends to give more weight unto the realness cast in the hot hand fallacy as opposed to the gambler‟s fallacy. However, there is no conclusiveness as to the wellbeing or vagueness of either given that both are heuristics, investors making judgments on how things appear rather than how statistically likely they are