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Ulric B. and Evelyn L. Bray Seminar in Political Economy

Thursday, April 14, 2016
4:00pm to 5:00pm
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Baxter B125
The Hot Hand Fallacy Fallacy
Joshua Miller, Assistant Professor, Department of Decision Sciences, Bocconi University,

Abstract

We find a subtle but substantial bias in a common measure of the conditional dependence of present outcomes on streaks of past outcomes in sequential data. The mechanism is a form of selection bias, which leads the sample proportion to underestimate the true probability of a given outcome, when conditioning on prior outcomes of the same kind. The biased measure has been used prominently in the literature that investigates incorrect beliefs in sequential decision making --- most notably the Gambler's Fallacy and the Hot Hand Fallacy. Upon correcting for the bias, the conclusions of some prominent studies in the literature are reversed. The bias also provides a structural explanation of why the belief in the law of small numbers persists, as repeated experience with finite sequences can only reinforce these beliefs, on average.

This is a combination of two papers found here and here.

For more information, please contact Barbara Estrada by phone at 626-395-4083 or by email at [email protected].