Hot hand fallacy states that if performing well in last consecutive trials, a person might perform well in the next trials. In fact, the streak (of well-performance) may just be because of pure chance. If this is the case, the results in the few consecutive trials infer nothing about the next trials.
Hot hand fallacy is perceived in various fields such as sport or business. We usually judge people (e.g., basketball players or companies) by statistics. But we usually misled by a hot hand fallacy. When a good player makes several baskets consecutively, we tend to think that his hand is “hot”, and that his teammates should give him the ball. So if an average player makes several baskets consecutively, does is mean that his is better than a good player? No, because if he is better, his statistics would have been better. The fact that he makes a lot of baskets consecutively implies that he might miss a lot of baskets too. We just don’t know when it will happen.
What about when you see a company performs above average for 12 consecutive year? Would you think that the managements working for that company were great? Alternatively, would you think that the streak is just a chance? Let's analyze the chance, shall we?
Let’s flip a coin. What are the chance that you will toss a head? One in two, right? What about 2 heads in rows? One in four right? Now think of head as when a company performs above average and a tail as when a company performs below the average. The chance of one company will perform above average for 12 consecutive months is just the chance of tossing heads for 12 consecutive time, which is 1 in 4096, pretty unlikely, isn’t it? So we might think that the management must be really good to beat the odds of 1 in 4096. Not quite!
Why not? Don't forget that we have more than one company in the market. Let’s say we have 1000 companies in the market. What are the chance that one of those companies will perform above average for 12 consecutive years? That would be 1 in about 4.62. So it's not very low, right?
So what exactly does it mean? For a company, it's still hard to perform above the average for 12 consecutive months. But it's not hard to find one of them which performs above the average for 12 consecutive months.
Source: The Drunkard's Walk: How Randomness Rules Our Lives by Leonard Mlodinow, Chapter 9 [Read the Book Review] [Read the Previous Part] [Read the Next Part].
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Book or Audiobooks?
Personally, I prefer audiobooks. It's fun, and I can listen when I'm doing something else. It also makes other activities (e.g., jogging) a lot more fun. For more detail about audiobooks, please read [this post].There is one more reason that may encourage you to go for the audiobook version. You can get it now for FREE. Audible offers you a free trial for 14 days. Even if you get the book and cancel the subscription right away (so that you don't have to pay), you can keep the book. And, don't worry if you lost the audiobook file. Just log into audible.com. You can keep downloading the over and over again.
About the summary: It takes time to finish up a book. And, when you do, sometimes, you want to review what you learn from the book. If you do not make notes as you read, you might have to go through the book once again. This can be time-consuming when you are dealing with a book. But you can still flip through the book and locate what you are looking for
However, when the material is an audiobook, it is extremely hard to locate a specific part of content. Most likely you will have to listen to the entire audiobook once again.
This book summary will help solve the pain of having to go through the book all over again.
I am leaving out the details of the books. Most books have interesting examples and case studies, not included here. Reading the original book would be much more entertaining and enlightening. If you like the summary, you may want to get the original from the source below.
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