Investment Trios Are Less Prone to the Hot Hand and Gambler’s Fallacies and Make Better Investment Strategies

Abstract

An experimental study was conducted to determine the minimum group size for which the mitigating effect for the hot hand and gambler’s fallacies can be felt. This is quantified by looking if groups are as prone to the hot hand and gambler’s fallacies in making decisions as their individual counter parts. Results suggest that groups maximize their investment returns better than individuals as the former choose to decide on their own more and rely on the experts’ opinions less. Triads are the least biased with the hot hand and gambler’s fallacies and thus are able to make more rational decisions and consequently maximize their investments better than the other treatments.These data allowed us to recognize the benefits of forming investment clubs consisting of three members since their decisions are more likely in line with the profit maximizing strategy in comparison with the decisions made by pairs and individuals.