Question

In: Economics

What are the “hot hand fallacy” and the “gambler’s fallacy?”

What are the “hot hand fallacy” and the “gambler’s fallacy?” Give an example of each. Which do you think is more likely to happen to you?Why?

Solutions

Expert Solution

Hot hand fallacy- This is a misconception where people develop a thinking that in past, certain things have continuously happend and that is why they are going to repeat in future. They develop a positive relation between past and future events.

Gambler's fallacy - In case of gambler fallacy, opposite of hot hand fallacy happnes. People believe that things in the past and events of future are negatively related. If certain things or event have happened in past then they are not going to happen in future and there opposite will happen and there is low probability of repeating.

Example- Existence of both the theories are often seen in financial market. Where analyst and investors believe in any of the notion at a time. People start squaring off their position thinking that upward trend in the past can over and now price of the security will start falling. Similarly, most of the students fall under hot hand fallacy, while reading the previous year question they look at the questions which are most repeated and prepare them thinking that they will repeat in the coming exams also.

Therefore as students we often fall in Hot Hand Fallacy because our actions are followed by past events, thinking that they will repeat.

However both the theories are irrelevant and each event should be considered independent and our decision should be based on right logics.


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