IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v187y2020ics0165176519304471.html
   My bibliography  Save this article

The gambler’s and hot-hand fallacies: Empirical evidence from trading data

Author

Listed:
  • Pelster, Matthias

Abstract

I test the prediction of Rabin and Vayanos (2010) that a belief in continuation of streaks should be observed following long streaks, while a belief in reversals should be observed following short streaks. Using a unique sample of retail investor trading data, the paper provides novel empirical evidence on the gambler’s and hot-hand fallacies.

Suggested Citation

  • Pelster, Matthias, 2020. "The gambler’s and hot-hand fallacies: Empirical evidence from trading data," Economics Letters, Elsevier, vol. 187(C).
    • Handle: RePEc:eee:ecolet:v:187:y:2020:i:c:s0165176519304471
    DOI: 10.1016/j.econlet.2019.108887
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176519304471
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2019.108887?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Matthew Rabin & Dimitri Vayanos, 2010. "The Gambler's and Hot-Hand Fallacies: Theory and Applications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 730-778.
    2. Maarten Meeuwis & Jonathan A. Parker & Antoinette Schoar & Duncan Simester, 2022. "Belief Disagreement and Portfolio Choice," Journal of Finance, American Finance Association, vol. 77(6), pages 3191-3247, December.
    3. Sigrid Suetens & Claus B. Galbo-Jørgensen & Jean-Robert Tyran, 2016. "Predicting Lotto Numbers: A Natural Experiment On The Gambler'S Fallacy And The Hot-Hand Fallacy," Journal of the European Economic Association, European Economic Association, vol. 14(3), pages 584-607, June.
    4. Matthew Rabin, 2002. "Inference by Believers in the Law of Small Numbers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(3), pages 775-816.
    5. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
    6. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    7. Sigrid Suetens & Claus B. Galbo-Jørgensen & Jean-Robert Tyran, 2016. "Predicting Lotto Numbers: A Natural Experiment On The Gambler'S Fallacy And The Hot-Hand Fallacy," Journal of the European Economic Association, European Economic Association, vol. 14(3), pages 584-607, June.
    8. Christine Brown & Jonathan Dark & Kevin Davis, 2010. "Exchange traded contracts for difference: Design, pricing, and effects," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 30(12), pages 1108-1149, December.
    9. Camerer, Colin F, 1989. "Does the Basketball Market Believe in the 'Hot Hand'?," American Economic Review, American Economic Association, vol. 79(5), pages 1257-1261, December.
    10. Stöckl, Thomas & Huber, Jürgen & Kirchler, Michael & Lindner, Florian, 2015. "Hot hand and gambler's fallacy in teams: Evidence from investment experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 117(C), pages 327-339.
    11. Roger K. Loh & Mitch Warachka, 2012. "Streaks in Earnings Surprises and the Cross-Section of Stock Returns," Management Science, INFORMS, vol. 58(7), pages 1305-1321, July.
    12. Elena Asparouhova & Michael Hertzel & Michael Lemmon, 2009. "Inference from Streaks in Random Outcomes: Experimental Evidence on Beliefs in Regime Shifting and the Law of Small Numbers," Management Science, INFORMS, vol. 55(11), pages 1766-1782, November.
    13. Gregory R. Durham & Michael G. Hertzel & J. Spencer Martin, 2005. "The Market Impact of Trends and Sequences in Performance: New Evidence," Journal of Finance, American Finance Association, vol. 60(5), pages 2551-2569, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fang, Yan & Yuan, Jie & Yang, J. Jimmy & Ying, Shangjun, 2022. "Crash-based quantitative trading strategies: Perspective of behavioral finance," Finance Research Letters, Elsevier, vol. 45(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Angie Andrikogiannopoulou & Filippos Papakonstantinou, 2018. "Individual Reaction to Past Performance Sequences: Evidence from a Real Marketplace," Management Science, INFORMS, vol. 64(4), pages 1957-1973, April.
    2. Andrikogiannopoulou, Angie & Papakonstantinou, Filippos, 2017. "Individual reaction to past performance sequences: evidence from a real marketplace," LSE Research Online Documents on Economics 87997, London School of Economics and Political Science, LSE Library.
    3. Daniel J. Benjamin, 2018. "Errors in Probabilistic Reasoning and Judgment Biases," NBER Working Papers 25200, National Bureau of Economic Research, Inc.
    4. Joshua B. Miller & Adam Sanjurjo, 2019. "Surprised by the Hot Hand Fallacy? A Truth in the Law of Small Numbers," Papers 1902.01265, arXiv.org.
    5. Guillermo Baquero & Marno Verbeek, 2022. "Hedge Fund Flows and Performance Streaks: How Investors Weigh Information," Management Science, INFORMS, vol. 68(6), pages 4151-4172, June.
    6. Qingxia Kong & Georg D. Granic & Nicolas S. Lambert & Chung Piaw Teo, 2020. "Judgment Error in Lottery Play: When the Hot Hand Meets the Gambler’s Fallacy," Management Science, INFORMS, vol. 66(2), pages 844-862, February.
    7. Guillermo Baquero & Marno Verbeek, 2015. "Hedge fund flows and performance streaks: How investors weigh information," ESMT Research Working Papers ESMT-15-01, ESMT European School of Management and Technology.
    8. Neszveda, G., 2019. "Essays on behavioral finance," Other publications TiSEM 05059039-5236-42a3-be1b-3, Tilburg University, School of Economics and Management.
    9. Daniel J. Benjamin & Don A. Moore & Matthew Rabin, 2017. "Biased Beliefs About Random Samples: Evidence from Two Integrated Experiments," NBER Working Papers 23927, National Bureau of Economic Research, Inc.
    10. Joshua B. Miller & Adam Sanjurjo, 2014. "A Cold Shower for the Hot Hand Fallacy," Working Papers 518, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    11. Miller, Joshua B. & Sanjurjo, Adam, 2021. "Is it a fallacy to believe in the hot hand in the NBA three-point contest?," European Economic Review, Elsevier, vol. 138(C).
    12. Miller, Joshua Benjamin & Sanjurjo, Adam, 2018. "A Visible (Hot) Hand? Expert Players Bet on the Hot Hand and Win," OSF Preprints sd32u, Center for Open Science.
    13. Miller, Joshua Benjamin & Sanjurjo, Adam, 2018. "A Bridge from Monty Hall to the Hot Hand: Restricted Choice, Selection Bias, and Empirical Practice," OSF Preprints dmgtp, Center for Open Science.
    14. Roger K. Loh & Mitch Warachka, 2012. "Streaks in Earnings Surprises and the Cross-Section of Stock Returns," Management Science, INFORMS, vol. 58(7), pages 1305-1321, July.
    15. Si Chen, 2022. "Information and dynamic trading with the Gambler’s fallacy," Mathematics and Financial Economics, Springer, volume 16, number 1, June.
    16. Daniel L. Chen & Tobias J. Moskowitz & Kelly Shue, 2016. "Decision Making Under the Gambler’s Fallacy: Evidence from Asylum Judges, Loan Officers, and Baseball Umpires," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1181-1242.
    17. Bao, Te & Corgnet, Brice & Hanaki, Nobuyuki & Riyanto, Yohanes E. & Zhu, Jiahua, 2023. "Predicting the unpredictable: New experimental evidence on forecasting random walks," Journal of Economic Dynamics and Control, Elsevier, vol. 146(C).
    18. Joshua B. Miller & Adam Sanjurjo, 2015. "Surprised by the Gambler’s and Hot Hand Fallacies? A Truth in the Law of Small Numbers," Working Papers 552, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    19. Daniel Chen & Tobias J. Moskowitz & Kelly Shue, 2016. "Decision-Making under the Gambler's Fallacy: Evidence from Asylum Judges, Loan Officers, and Baseball Umpires," NBER Working Papers 22026, National Bureau of Economic Research, Inc.
    20. Miller, Joshua Benjamin & Sanjurjo, Adam, 2018. "Is it a Fallacy to Believe in the Hot Hand in the NBA Three-Point Contest?," OSF Preprints dmksp, Center for Open Science.

    More about this item

    Keywords

    Gambler’s fallacy; Hot-hand fallacy; Representativeness; Retail investors;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:187:y:2020:i:c:s0165176519304471. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.