FHS Kufstein Tirol
Studiengang Internationale Wirtschaft und Management
International Business Studies

The Hot Hand effect and the impact of perceived streakiness
on human behaviour

Diplomarbeit
zur Erlangung des
Akademischen Grades
Magister (FH)

vorgelegt von: Manuel Scheiber
vorgelegt am: 04. Juli 2006

Table of contents

Table of contents ... I
List of figures ... II
List of tables ... III
List of abbreviations ... IV

1 Introduction ... 1
1.1 Motivation and basic background ... 1
1.2 Methodology and organization ... 2

2 The Hot Hand: A literature overview ... 3
2.1 Introducing the Hot Hand ... 3
2.2 Hot Hand and Gambler’s Fallacy ... 6
2.3 Streakiness in the financial market ... 11
2.4 The Hot Hand effect in sports ... 15
2.4.1 Theoretical Issues ... 19
2.4.2 Problematic issues of Hot Hand research in sports ... 29
2.4.3 More research regarding the Hot Hand in sports ... 31

3 Empirical analysis of professional bowling data ... 35
3.1 Basics of bowling ... 36
3.2 Collection of data ... 37
3.3 Analysis of professional bowlers’ performance ... 39
3.3.1 General analysis of bowling data ... 39
3.3.2 Individual analysis of bowling data ... 42
3.3.3 Analysis utilizing conventional tests ... 45

4 The Hot Hand in the betting market ... 49

5 Conclusion and suggestions for future research ... 55

6 Bibliography ... 58

7 Appendix ... 64
 

1 Introduction

1.1 Motivation and basic background

The discussion about the existence of the Hot Hand, a widespread belief that success breeds success, has been unsettled since it was initially mentioned in 1985. The authors of the study originally concluded that any observed streakiness was simply a misperception and that the sequences did not significantly differ from the outcome of a randomly generated process.

The reasons why the discussion became this extensive may only be assumed. One reason definitely is that the main application areas for the Hot Hand belief are sports and the financial market, two areas that a vast number of people get in touch with. A large number of men and women at least occasionally watch sports on television or attend a live game. More and more people also get involved in actively managing their savings by a growing number of different financial instruments like shares and bonds.

Another reason for the amount of existing analyses and studies about topics related to the Hot Hand effect is that arguments for and against the Hot Hand range from statistical problems, e.g. which statistical test to apply, to deep psychological issues like the perception of random processes.

Knowing whether the believers in the Hot Hand or the sceptics are right is essential to everybody because in many everyday situations, people act according to which of the two groups they belong to. This is especially important in situations where money is at stake. Therefore, the aim of this paper is to answer the following research question: Is the belief in the Hot Hand effect a fallacy and what is its impact on human behaviour in an economic environment as the betting market?

While a lot of research has been done in the search for the existence of the Hot Hand, it has rarely been attempted to take into account a wide range of suggestions concerning the way of examination and inference from data, and to conduct an empirical study that satisfies most of the criticism. Thus, the analysis of data will be conducted in a way that avoids errors and uncertainties that have been encountered in more than 20 years of discussion about the Hot Hand effect.

The observations of gambling behaviour in the sports betting market shall indicate how a belief in the Hot Hand influences economic decisions. In the betting market, as well as in every other economic environment it is essential that decisions are made on a rational basis.
 

1.2 Methodology and organization

If performance of players in sports (success or failure) was simply due to their individual ability and day to day deviations of performance, the player’s seasonal record of performance should resemble the flips of a coin with the corresponding probability to come up heads or tails.

In case the examined data sample is small, a large deviation from the expected outcome is likely. Therefore, the analyzed sample will consist of frame-by-frame data of all professional bowlers who participated in official tournaments during the 2004-2005 season.

Supposing that performance is not correlated and does not depend on previous performance, e.g. the last or some of the last games, the analyzed data should not exhibit more patterns of success and failure than a corresponding coin. The result of this analysis and findings about the behaviour of people in an economic environment can then be used to evaluate if and to what degree human perception of streakiness deviates from reality.

The deterministic approach that every outcome could be predicted by knowing all influencing factors, and that thus randomness was not existent, will be disregarded in this paper. The main task is to find an answer to the research question.

The following chapter will summarize a number of studies about streakiness in the financial market and various articles about the existence or non-existence of the Hot Hand in sports. The methodology of the analysis of professional bowling data, which is conducted in order to examine the extent of the Hot Hand effect, will be explained in detail in Chapter 3. Chapter 4 will provide an overview of the behaviour of people in the betting market, which represents an economic environment. In the final chapter, the most important findings will be summarized and it will be proposed what the correct perception of streaks in skilled performance and the according behaviour should be.

2 The Hot Hand: A literature overview

2.1 Introducing the Hot Hand

One of the main issues in the discussion about the Hot Hand is the perception of randomness. In terms related to this paper, a process generating sequences without memory and any bias towards one result can be regarded as random . If an absolutely fair coin was tossed an infinite number of times, half of the tosses would come up heads and half would come up tails.

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