Hot Hand

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Definition of 'Hot Hand'

The hot hand fallacy is a cognitive bias that leads people to believe that a person who has experienced success in a given task will continue to be successful in that task. This belief is often based on the gambler's fallacy, which states that the odds of an event happening are independent of past events.

In the context of finance, the hot hand fallacy can lead investors to make poor decisions. For example, an investor may see that a particular stock has been rising in value and decide to buy more of that stock, believing that the stock will continue to rise. However, the stock may actually be due for a correction, and the investor may end up losing money.

The hot hand fallacy can also lead investors to make emotional decisions. For example, an investor may sell a stock that has been losing value because they believe that the stock will continue to decline. However, the stock may actually be undervalued and could eventually rebound.

It is important to be aware of the hot hand fallacy and to avoid making decisions based on it. When making investment decisions, it is important to consider all of the relevant information, including the historical performance of the investment, the current market conditions, and the potential risks involved.

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