Hot-Hand Fallacy
The belief that a run of successes will continue because the performer is on a streak.
How it is identified
Test: the predicted probability of continued success rises with the length of a prior run of successes
Unit
qualitative
In depth
The hot-hand fallacy is the mirror of the gambler's fallacy — one expects runs to continue and the other expects them to break — and the fact that both feel natural shows that neither comes from evidence. In investing it appears as chasing a fund manager after several good years, when performance persistence in fund data is weak. It also produces increasing position sizes after a winning streak, which is exactly when overconfidence is highest and market conditions are most likely to be favourable to everyone. Longer records and comparison against a benchmark are the correction.
Worked example
A fund beats its index for four consecutive years and attracts heavy inflows. Studies of persistence find that top-quartile funds are close to randomly distributed across subsequent quartiles, so the streak carries little predictive weight.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Hot-Hand Fallacy” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.