Hot-hand fallacy.
In plain English
The hot-hand fallacy is the belief that a run of successes signals that more are coming, that a person or fund is on a roll. Gilovich, Vallone, and Tversky examined basketball shooting in 1985 and found that streaks people read as hot hands were largely consistent with chance, and that observers saw hotness even in random sequences. In money it appears when a fund manager or stock picker with a few strong years is assumed to be skilled and about to keep winning, when the record may be closer to luck than the streak suggests. Later work has debated the effect in sports, but the money lesson, that a short winning run is weak evidence of durable skill, holds.
01Why it matters
Chasing whoever is hot, a fund or a picker, tends to buy in near the peak of what may be luck, so recognizing the hot-hand fallacy guards against paying up for a streak that carries little predictive weight.
02The math, step by step
A fund posts three strong years and money pours in, on the belief the manager is hot. If those years were closer to chance than skill, the streak says little about the next year, and the latecomers bought a run that was already behind it.
03What this is NOT
It is not the claim that skill never exists. It is that a short winning streak is weak evidence for it. Distinguishing real skill from a lucky run takes a long record, not the recent hot stretch the fallacy latches onto.
04Receipts
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