You're sitting at home with a bottle of beer and watching football. On the pitch, you see a striker that scored in 7 consecutive matches. If you've been watching football for a while, you'll know that every match is unique. However, you'll have the impression that the specific striker has a higher chance of scoring again. Why does this happen? To find out, let's sail to the United States, where this phenomenon known as “the hot hand fallacy” was first discovered.
Definition of the Hot Hand Fallacy
The hot hand fallacy started in the US during a basketball tournament. In 1985, a study was carried out to verify if a player, after scoring multiple shots in a row, had more chances of making successful shots compared to a time or situation if he hadn't scored any within the same match. In fact, there was this hunch among the audience and players that the player had a hot hand, and it seemed like it's impossible for him to miss the point.
However, despite the numerous analyses made, researchers concluded that there is no correlation between the "hot hand" and the higher chance of successive shots. In reality, it seems that the opposite seemed more probable. This is because the players who felt confident about themselves tried to take shots in more challenging situations; therefore, it comes with a bigger risk of missing them.
The hot hand fallacy is the effect that causes us to think that after consecutive successes, more positive results will occur (and vice versa).
The Effect of the Hot Hand Fallacy in the Football Betting
In football, whenever a team goes on a winning streak, bettors will usually notice. This may take the form of money being placed on them in the next game, shortening their odds below the value if the winning streak never happened.
Indeed, one of the factors that cause a team to have a winning streak might be due to a tangible cause like the feel-good factor that inspired the previous wins. However, this may also be overestimated if bettors ignore the influence of luck and fully embrace the hot hand fallacy.
Other things may also influence winning streaks that bettors don't consider and, therefore, overestimate the team's succeeding chances. Bettors may only look at the hyped-up candidates. This creates biases that encourage bettors to make unweighted decisions. From the basketball tournament we’ve mentioned above, we can say that situations with large chunks of luck are expected to move towards the mean value more times with a higher pace.
In the topic of a hot team doing a winning streak, this may imply that a team is more likely to start losing again than bettors may believe. This means that their betting odds will be shorter than the fair value. On the contrary, teams that are ignored under-bet and therefore result in higher prices. This is where experienced bettors take advantage. Looking at these situations and finding out where it comes from is essential. According to the hot hand fallacy phenomenon, these "cold" teams will have a better chance to start winning and offer more value for bettors.
The Profitability of 'Hot' and 'Cold' Hands
To find out about the hot hand hypothesis, we need to first find out the details of the 'heat' and 'cold' values. We need to utilise one of the mathematical methods, but we're not going to get too much in all the numbers and formulas. However, we're still aiming to find the true value of the team (excluding the betting margin).
To find out if the hand-hand works out or not, you'll need an extensive enough set of data to test it on. We suggest using historical data from the top European football leagues such as the La Liga, Serie A, Bundesliga and, of course, the Premier League. This may test the effectiveness of the hypotheses by analysing the matches from competitions of those leagues.
If you've gone over the proposed sample, you should have the result of a total turnover of a little over 100%, which means you would break even in the long run. Your returns would also be insignificant. Now, you need to break down the 'hot' and 'cold' teams and get a bit of a better picture. In this case, the "hotter" team usually shows smaller returns. On the contrary, the "colder" teams would offer better winnings than the total return result. This shows that the hot hand fallacy greatly affects the "colder" teams.
Doing experiments with the "hotness" value can offer more than what we've been emphasising. You can try making a more specific test or narrow down your criteria. It's entirely up to you. However, the overall trend shows that the "colder" teams will have a higher overall return.
Also, don't forget that for the purpose of these experiments, we only use the true market value, which does not include margins. These scenarios are highly unlikely to happen in reality, as the bookies don't practice it. Another thing that may influence the results is that bookies often restrict winning customers. More detailed and advanced development of the test may lead bettors to even more profits even with the restrictions applied.
The Human Factor and the Bettor's Fallacy
Also, in betting, the hot hand fallacy may lead the bettors to stake their money based on their perception of fortune and self-confidence. "It's my lucky day" is the phrase we usually say when we're experiencing a series of events that favours us. If we have to guess a coin toss whether it will land on heads or tails, we generally consider our choice as more probable if it's our lucky day or if we've guessed it right three times in a row. However, the reality is that the chances for heads or tails will always be 50%.
A study from 2004 shows that in predicting events, the factor of choice is crucial for the hot hand fallacy. In the first experiment, which was about choosing between two results with precisely the same chances of happening (like heads or tails), the subject generally makes their decision based on a series of either successes or failures.
"If I've guessed heads right five times in a row, it's impossible to make a wrong decision. Therefore, I'll choose heads again."
Deciding on your guess based on consecutive successful guesses does not change the chances for heads or tails.
On the other hand, if we remove the choice factor and base our decisions only on the "randomness" concept, this makes us fall into the opposite bias, known as the gambler's fallacy. For the second experiment, a two-coloured roulette took part in it. In this experiment, if the red appeared three times back-to-back, the subjects would think that it was impossible if the black was not the following result. The result wouldn't be random.
This event encourages us to think that if something happens repeatedly, it's impossible for it to happen again, so the opposite needs to happen. Or we don't see it as genuinely random. And this occurs only if we don't include the human factor in the decision: self-confidence or fortune.
How to Avoid the Hot Hand Fallacy
Back to the hot hand fallacy, the focus now should be on understanding why this phenomenon occurs and the reason for its existence. Why don't we decide our choices based on cold logic instead? Why do we tend to favour irrationality instead of rationality?
We have probably failed to predict some kind of events during our entire life, which is the base of this fallacy and led us to this kind of irrational reasoning. Therefore, the cause of these failures is attributed to our inability to understand this "randomness" concept. It's a matter of representativeness, as we like to consider a small sample size as generalisable to everyone else. This is why in a series of random events, we either believe the event is highly improbable (gambler's fallacy) or not random enough because it's affected by human factors (hot hand fallacy).
Someone may state that these subjects in the future could be less affected by these kinds of biases as they have more experience. Yet, few studies have proven that age isn't a determining factor.
So, is it possible to avoid these cognitive biases? A study from 2012 by Castel, Rossi and McGillivray analysed the procedural characteristics related to this fallacy. They've discovered that the influence of these illusions on the subject vanishes after spending more time undergoing the experiments. Experience is indeed an important factor when dealing with these topics on specific biases. The more you're exposed to it, the quicker you will adapt. Therefore, that is what you should do too.
The first step for everyone is to be aware of how our mind works. Know your thoughts better and learn how to use them without taking too much information.
