I’ve posted Entry #250 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Why Stocks Follow a Random-Walk Pattern in Some Time Frames and Not in Others.
Juicy Excerpt: Say that a significant factor in whether a basketball falls through the hoop or not is the level of confidence felt by the player taking the shot. And say that confidence grows when a high percentage of shots taken over a period of time goes in. Having shots go in would increase the shooter’s confidence. So it would be natural to expect more shots to go in during the following time-period.
Hot hands are the product of increased player confidence. That means that they are real. You want the player with the hot hand taking a shot in the final seconds of the fame because he is the more confident player and thus the player more likely to sink the shot.