20.10.2015 - 00:00:00
“Gamblers, Scientists and the Mysterious Hot Hand” - New York Times Mentioned Kai Duttle's Research
In the New York Times article “Gamblers, Scientists and the Mysterious Hot Hand”, George Johnson writes about the role of the law of small numbers in recent research, and its application to the real world. He thereby refers to a paper by Kai Duttle, published in the Ruhr Economic Papers (a joint publication of the Universities of Bochum, Dortmund and Duisburg-Essen, and the RWI).
The law of small numbers is one of the best documented behavioral biases in the psychology literature of judgment and decision making. A sizeable number of popular studies in economics and finance assume decision makers who overinfer the representativeness of a small sample of observations. Particularly interesting thereby are judgments of random processes with exactly two outcomes, like coin flips (head/tails) or basketball shots (hit/miss). There are two well-documented heuristics that hold completely opposite predictions for subjects’ probability assessments: the gambler’s fallacy predicts that people believe in mean reversion of observed sequences over time, while the hot hand fallacy assumes agents to believe in the continuation of streaks.
In his paper “Disentangling Two Causes of Biased Probability Judgment – Cognitive Skills and Perception of Randomness” Kai Duttle investigates the influence of cognitive abilities on probability forecasts. He finds that if the randomness in observed sequences is very salient (e.g., consecutive coin tosses), intuitive thinkers believe in mean reversion. However, if randomness is less obvious (e.g., some random daily event), intuitive thinkers believe in trend continuation and more rational thinkers believe in mean reversion.
Kai Duttle is a Doctoral Fellow at the IN-EAST Graduate Research Training Group 1613 “Risk and East Asia”. His research activities are supervised by Prof. Werner Pascha and Prof. Jeannette Brosig-Koch.