I am a Nobody compared to stalwarts and “well educated” intellectuals like Richard Thaler, and therefore may be speaking out of line.
I am a practioner and that CHANGES everything.
And through the sheer experience gained through my practice, I have come to a rather counter intuitive conclusion that “hot hand fallacy” as propagated by Mr Thaler is just baloney!!
Lets break it down, WHAT IS HOT HAND FALLACY. Watch this video and listen to Thaler explain it himself.
So What Mr. Thaler is saying is that Hot hand fallacy is a false presumption of expecting the status quo. Of foolishly thinking that just because something/someone is doing well, he is more likely to continue to do well.
Now, an important distinction needs to be made which he completely missed. The distinction is that IT DEPENDS on what % of result depends on luck.
If you are playing roulette (where Luck plays 100% role) and you are on a winning streak, It will be wise and sane to take your chips and run with it before casino managers spot the error in machine.
But he extended his theory too far and gave an example of basketball and then stock markets. Lets take both sports and stocks one by one.
If you are a bowler in a game of cricket, you know how different it is to bowl at Adam Gilchrist when he has just arrived at the crease compared to say when he is playing at 40 odd. Mr Gilchrist at 40 usually hits a state of “flow” and hits 4s at will decimating the attack to shreds. This example holds true for all aggressive flow players across different games.
Lets take a non-aggressive player example to bring home the point.
If you don’t get Rahul Dravid out within say 15–20 mins of his arrival at crease, you might have to slog and ‘thaler’ it out the entire day on field.
Academicians (non-PRactioners) in rush to get published and win awards don’t pay much heed to disconfirming evidence. Concept of Hot hand is not a fallacy but a fact of life. Every sports man knows it. Even in games like poker (where luck plays a considerable role) you cannot rule out the power of momentum. Try and bet your bankroll against Gus Hansen when he is on full tear. Your academic sorry ass will handed to you on a platter.
Lets talk about Stock markets and how applicable is the concept of HOT hand.
Mr Thaler conveniently hand picked a time from history to make a point that people did not care about the bubble in the market and got burnt.
Funny thing is , the same example is a testimony to the argument on the opposite side. HOT HAND exists and that is the reason bubbles are formed.
Why would you pick 2007 as the judgement date for your hot hand fallacy argument. Bull run was in full steam since 2003.
And sure bubble got burst and people lost money, what is new in that. I can see the price chart, why do I need a behavior mumbo jumbo artist to tell me that!!!
I feel strongly about this topic because the entire concept is nothing short of a charade.
Here is a conclusion.
EVERY THING MEAN REVERTS, we know that, we don’t need a “scientist” to tell us that, however HOT HAND is not a fallacy but a fact of life. Remember, via power of momentum (hot hand) UNITECH went up 400x before that mean reversion happened.
Bottom-line: Never listen to anybody who aint doing it.