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  • Writer's pictureJohn Brandy

Hot Hand Fallacy

Updated: Apr 5

What's our listener anchor for the week?

Their Lighthouse, right?

Kuf. Their one-sentence takeaway.

Oh, you mean that bit that goes at the top of the show notes?

Yes, that bit. That sentence. That, you know, thing.

That psychological misconception? Oh, yeah, I love the idea of talking about psychological misconceptions like this one.

Or what's gonna be the next episode…

Episode 43?

Yes! Episode 43! Good one, DT.

Yes, I do have a great memory. What did we talk about? Incorrect beliefs?

Um, that’s the one where we talk about Shiny Object Syndrome. Would you like me to find you a memory test?

Nope. Not necessary. I am a great eater of beef!


That’s a line from Shakespeare’s Twelfth Night.

Oh, right. I notice he didn’t title any of his plays “The Hot Hand Fallacy”.

That’s probably because the line wasn’t created until the year…

The year 1985, according to Wikipedia.


And Scientific American, and Investopedia.

Okay, But he SHOULD have used that title.

And he probably would have if it was around in 1602, but that’s not helping anyone understand it.

Oh, right. As you like it…

Okay, in a nutshell, hot hand fallacy says…

or purports to say…

or purports to say that if something or someone has been successful repeatedly with their hit pattern...

And they've done so in recent times…

Yes, that they are on a hot streak.

So what does that lead to?

It leads to their likelihood of being successful the very next time.

So far, so good.

Agreed, but the problem is that they put that likelihood at better than 50/50.

Not following…

If it’s better than 50/50, it means that the hot streak affects future performance, which is JUST NOT TRUE.

This is sounding kind of sports-like.

Sports-like huh? Well, that’s for a very good reason.

The origin of the Hot Hand Fallacy was actually specific to basketball.

The "Hot Hand in Basketball" study came out in 1985, done by Thomas Gilovich, one of the authors of “How We Know What Isn’t So” among other books, and Amos Tversky, who is credited with a lot of prominent studies like this with a guy named Daniel Kahneman.

So, players are more likely to make a successful shot if their previous shot was successful.

That’s the idea, but what we learned is that people don’t do well with random events. We’ll see that more later with the coin toss example I have ready.

So, as you can see, the origin of the Hot Hand Fallacy was actually specific to basketball.

And it influences a lot of decisions that we have on a day-to-day basis.

I’m imagining the impact on coaching.

Yes, the debate about hot hand shooting certainly has had an influence on coaching decisions.

The definition grew and the research around it grew.

It's obviously had a real impact. However, it is not based on the real truth.

I guess not. Doesn’t seem possible to make that more than 50/50.

Since when does “possible” matter in illusions?

Right, which is part of the science behind logos.

True, but as I’ve gotten used to saying lately, that’s for a different show.

Draw us all a picture of this problem.

Okay, here goes. Oh wait, are you a sports fan?

Not every sport, but my mind picture thing works.

Kuf. Right. Fire up that picture thing now with your ideal view of a basketball court.

Who do you like as a player?

Oh, what does everybody say? LeBron.

Great. This, uh, LeBron guy, the basketball player, we’ll say he’s made his last 10 shots in a row.


That it does, but here’s the thing.

Hot Hand Fallacy says that he’s more likely to make the 11th, too.

That's a lot of consecutive shots and it doesn't even consider shot difficulty. But people don’t bet on that.

Oh, they will. Heard of Micro Betting yet?

Rabbit hole, dude.

You’re right, but at least I know about it.

Back to LeBron.

Right, so he might very well make the 11th.

No streak of misses here. And you’d be happy with that bet.

True, but I’ve learned something very important.

How important?

Important enough to tie this all into investing.


Not quite. Time is important, but this is only the first break coming up.

Okay, so compare these, these, fake things.

Fake things?

Maybe not “fake”. Starts with “F”.

Oooohhhhh! Fallacies!

Compare and make me care!

Slick. That was very nice, DT.

Yes, I’m going to trademark that, and you know,

Make posters?

Kuf. Compare, I commanded.

Right, so there’s also this thing called The Gambler’s Fallacy.

The Hot Hand Fallacy is very closely related to the gambler’s fallacy.

It’s not the same thing.

Right, it's not the same thing, but it's very closely related, and I'll explain.

The gambler's fallacy focuses on the probability of heads on the flip of a coin. It's sometimes called the heads/tails fallacy.

I’m guessing that's a cognitive illusion that makes it NOT TRUE.

Not saying that, but I AM saying that it goes against logic and truth.


When in Rome:

Don’t give me away, thanks.

Gamblers. Imagine we flip a coin 10 times and in eight of those 10 times, the coin comes up heads.

The gambler's fallacy says that there are 50/50 odds of either one happening, which is true.

It should also say, “EVERY TIME”.

You could say that.

In this example, however, the results of the previous 10 throws have been eight to one side and two to the other side.

This works for heads and tails, red and black, however, the choices are identified, and they’re eight to one side and two to the other side. That can really wear hard on anyone's sense of randomness.

But I’m guessing that gamblers don’t hear that.

They don’t! The gamblers fallacy logic says that the future coin flips MUST fall on the two side and not the eight side.


Because it has come up fewer times than it should so far.

These people are thinking that previous outcomes matter.

Using fair coins? But that’s not even a factor.

No, it’s not. But good luck with that argument.

Sports again.

Confusion, not sports, DT! Even though the color commentator is insisting that they're due for a win.

Or they're overdue even.

Or they're overdue for a touchdown, or a playoff win, or whatever else you want to put in there.

You know something?

Why, yes, DT. I DO know something.

That was a standard figure of speech.

That’s true. And my response was to show a point.

That we all are subject to not thinking clearly sometimes.

But that’s not what I was wondering.

And, I’ll fall for that, what WERE you wondering?

How you’ll manage to tie this one in.

Okay, so was that a challenge?

Was WHAT a challenge?

Just before the break, you were wondering how I would tie this in.

Yeah, to investing. This should be good.

And you don't want me to tie that into the 2018 update on the study, right?

No, please don't.

Okay, try this statistical power on for size.

In 2020, US Airlines lost 24.2 billion dollars,

Much of that due to Covid.

I’ll give you that. But get this: In the same year, Tesla Short Sellers lost 35 billion dollars.

Doing what?

Betting against innovation.


So, what’s 35 divided by 24.2?

Approximately 1.4463

So, it means that people who were betting AGAINST innovation bet more AGAINST innovation…


Then all US Airlines LOST while trying not to lose anything.

And the tie-in?

The tie-in is that those short-sellers were going on a widespread BELIEF they had. They had what they thought was an intuitive sense that Tesla couldn’t keep on with its successful streak.

And BELIEF that it could happen is good, right?

Sure, anything can go to the moon. At least in theory.

But that’s not what investing is, right?

At least not most of investing. If you want to do the gambling thing with a few percent of the big picture, then okay. Just please don't rely on these FIXED beliefs like the hot hand phenomenon with your serious money.

But what about the BELIEF part?

Yes, well, if you believe that the hot streak will continue,

And you make no preparation for that.

Then you’ll start to invest for the wrong reasons.

And make mistakes.

Yes, and make mistakes. Your string of success might just end.

Which you don’t learn from.

Not always. Where’s this going?

Heh. You remember what old Nap Hill said, right?

He said a lot of good stuff.

Yeah, but he hit this aforementioned tendency we all have with this: “If you don’t learn from your mistakes, you might as well not make them.”

(Laughs) And how do you do that?

You remember. And you do better the next time.

And what do you do in order to remember?

You practice.

Right, which leads to:


¡Gracias por escuchar! ¡A la prochaine!

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