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Gambler's Fallacy in Investors' Decision-making
Javůrková, Tereza ; Kukačka, Jiří (advisor) ; Červinka, Michal (referee)
This thesis focuses on the Gambler's Fallacy and its effect on the behavior of investors operating in the stock market. The aim is to incorporate the psychological findings about this behavioral phenomenon to the field of finance. This allows us to analyze the dynamics of the stock market that results from human misconceptions about the probabilities of independent events. More specifically, we analyze the profitability of two types of virtual investors whose decision-making is affected by distorted probabilities based on the Gambler's Fallacy. We further define two other trivial benchmark investors' strategies with different levels of randomness. We examine investors' gains in a simulated efficient market as well as in the real S&P 500 index constituents. Our analysis builds on three different approaches: simulation analysis, empirical frequency analysis, and asset pricing models. By applying the simulation approach together with frequency analysis on the historical stock prices, we find that investors affected by the Gambler's Fallacy gain statistically higher returns than a random investor. Then, we ap- ply both the three-factor and five-factor Fama & French asset pricing model to stocks sorted into portfolios based on their previous earnings per share evo- lution. Our findings reveal a negative...
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The hot hand fallacy
Augustin, Michael ; Korbel, Václav (advisor) ; Šťastná, Lenka (referee)
The "hot hand" effect describes the phenomenon when an athlete makes a considerable in his performance following a series of successes. In the professional literature was the "hot hand" effect considered a fallacy until 2014, when a substantial bias was discovered in the original test method, and a new set of statistics, which controlled for the bias, was introduced. The aim of this work is to test the occurrence of "hot hand" using new methods and to create a performance analysis of both genders. Furthermore it will be proven that the "hot hand" is not a privilege of the best NBA players in the world, but can also occur in semi-professional leagues such as the Czech NBL. The first part of the thesis presents the theory of "hot-hand fallacy" and its important implications in the world of economics and finance. There is also a key review of the "hot hand" literature. In the second and third parts, the biased data and the methodology of the "hot hand" literature are presented, and a new method for controlling this bias is introduced. The results of individual analyses confirm the significant findings of the "hot" and "cold" hand and demonstrate the effectiveness of the new unbiased test. Results discussing the performance test according to gender and the possibilities of further testing are to be...
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