Students were asked whether they felt a player might have a “hot hand” and go on a shooting spree, where he would make consecutive shots? All of the players shook their heads as one. Summers took a breather, savoring the experience.
He said, “The answer is no.” Patterns may be found amid a sea of noise.
Finding a strategy to exploit a hot streak without taking more bad shots is the challenge.
If you’re looking for a tried-and-true approach to achieve this, asset management company recommends that you purchase the second-best performing asset class from the previous year and hold it for a year. This method may be repeated each year. Such a strategy has historically outperformed the S&P 500 on an annual basis while having just a little amount of additional volatility. (Of course, you shouldn’t place all of your money in areas with high momentum.) Assume that 10% of the time.
You should be able to earn somewhat greater returns by including a little amount of “hot hand” into your investment approach. And the gym isn’t even necessary.
Summers may be mistaken in this instance.
Using data from tracking cameras in 15 NBA arenas that recorded 83,000 shot attempts during the 2012-13 NBA season, three Harvard grads found that “players who are outperforming (i.e., are ‘hot’) are more likely to make their next shot if we control for the difficulty of that shot,” according to the study.
The authors found “a tiny but substantial hot hand impact” when considering the difficulty of the shot. If you want to put a figure on it, the probability of the following image being successful goes up 1.2% with each previous photo the player takes.
What does it matter?
There is a lesson to be learned from the paper’s results, even if your basketball abilities will never take you to the NBA.
And this has to do with how you invest your money.
“Players who consider themselves hot based on prior shot results shoot from much farther out, face tighter defense, are more likely to take their team’s second shot, and attempt more difficult shots.”
This simply implies that when a player takes specific shots (think three-pointers) at a more significant proportion than they typically do, the opposing defense responds by putting extra pressure on the player. With defenders paying greater attention to the shooter, he must attempt more complicated shots from farther out.
Does this have any bearing on how you want to build your professional brand?
After a few shots, a player becomes “hot” when he’s in the zone. He begins to overestimate his abilities. In addition to taking more pictures, he also begins to take more challenging shots.
The more tough shots he takes, the poorer his accuracy is, even if he’s more likely to make them initially because he’s hot. As a result, he’ll lose focus and start missing shots. Thus, he takes photos that take him “out of the zone” due to his overconfidence.
A lot of this strategy is based on momentum.
The power of momentum is undeniable in the financial markets. S&P Capital IQ’s Sam Stovall, managing director for U.S equities strategy, believes that historically investors are better suited to following last year’s winners than laggards in the near term.
When the market is going up, investors will invest in a stock or sector that is going up. Investors begin to assume that their ability as a trader is responsible for the profits rather than the momentum effect. These “hot hands” investors will soon start to trade more often to take advantage of their momentum. As a result, investors would ultimately lose interest in the stock market because of the high fees and blunders.
This does not imply, however, that momentum should be avoided entirely. “A good amount of evidence implies that whole asset classes that shine in one year have a better-than-average probability of excelling in the following,” Paul Lim said in a March 2014 piece.