The Hot Hand

29 January 2009 at 4:30 pm 3 comments

| Peter Klein |

Watching UNC beat Clemson in basketball last week — Clemson has lost all 54 games it has played in Chapel Hill, the longest such streak in the nation — I was reminded of the behavioral economics literature on the “hot hand” (Gilovich, Vallone and Tversky, 1985; Camerer, 1989;  Brown and Sauer, 1993), a version of the gambler’s fallacy in which people put too much weight on past results in predicting future performance. There is debate about hot-hand effects in sports, where the behavior of players and teams (unlike that of dice or roulette wheels) can certainly be affected by knowledge about past contests. If you’re on a team that has lost every game to a particular opponent, how can you not get nervous down the stretch? But such effects are hard to distinguish, empirically, from random error.

I haven’t seen much on hot-hand effects at the level of the firm, though there is a healthy literature on autocorrelation of stock returns (see Boudoukh, Richardson, and Whitelaw, 1994, for one survey). The business press often describes a firm being on a “hot streak” following a string of successful products or performance results (think Apple, Pixar, Google, etc.). If above-normal performance is anomalous, then investing in such firms is a mistake. If a firm’s hot hand reflects superior resources, strategies, market positioning, etc., and these advantages persist, then its hot hand may be real.

PS: When I taught at Georgia I used to know a great Clemson joke. Originally Clemson’s name was simply “Clem,” but it was decided that “Clem University” didn’t sound very distinguished, so they added “s” for chivalry, “o” for honor, and “n” for knowledge.

Update (2 February): Brian McCann notes that, including last night’s game, the NFC has won twelve consecutive Super Bowl coin tosses.

Entry filed under: - Klein -, Strategic Management.

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3 Comments Add your own

  • 1. Andre Sammartino  |  29 January 2009 at 6:01 pm

    So peter, what is the great joke you “used to know”? :)

  • 2. dgerard  |  29 January 2009 at 7:52 pm

    I wonder if the hot hand apply to the quality of blog posts?

  • 3. Peter Klein  |  29 January 2009 at 8:59 pm

    Andre, I’ll never tell! David, I think it might apply, but it will take a very expensive, government-funded study to say for sure. What did I do with those NSF application forms?

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