Hot Hand Fallacy: Avoiding Financial Pitfalls in Australia (2025 Guide)

Have you ever felt unstoppable after a string of wins—whether it’s picking stocks, backing a horse, or acing a few rounds of pub trivia? You might be falling for the ‘hot hand’ fallacy, a cognitive bias that can lead even the savviest Aussies to make risky financial moves. As we move through 2025, understanding this psychological trap is more important than ever in a world of volatile markets, sports betting apps, and meme stocks.

What Is the ‘Hot Hand’ Fallacy?

The ‘hot hand’ fallacy is the belief that a person who has experienced success with a random event—like making consecutive correct stock picks or winning several hands at poker—has a greater chance of continued success. Originally studied in basketball, where players were thought to shoot better after making a few baskets in a row, the phenomenon has since been debunked by behavioural economists. In reality, past successes in random or semi-random events don’t increase the odds of future wins.

Real-world example: During the 2024 ASX bull run, some retail investors believed their winning streak would continue and doubled down on risky tech shares. Many faced sharp losses when the market corrected in early 2025.

How the Hot Hand Trips Up Aussie Investors and Gamblers

From the Melbourne Cup to the ASX, the hot hand fallacy is alive and well in Australia. Here’s how it sneaks into everyday financial decisions:

• Stock Market: After a few good trades, DIY investors might take bigger risks, believing they have a ‘knack’ for timing the market. But in 2025, with increased market volatility due to shifting global interest rates and AI-driven trading, luck can turn fast.

• Sports Betting: Betting platforms report record activity in 2025, thanks to new in-play betting features. Punters who win early in a session may up their bets, convinced their ‘hot streak’ will last. Data from the Australian Gambling Research Centre shows that most streaks end abruptly, often leading to greater losses.

• Crypto Trading: After Bitcoin’s surprise surge in early 2025, Australian crypto traders who caught the wave often reinvested aggressively, only to be burned by the next correction.

Research from the University of Sydney (2025) found that belief in the hot hand increases after small wins, especially among younger investors using trading apps—fuelled by real-time notifications and social media hype.

Outsmarting the Hot Hand: Smart Moves for 2025

Recognising the hot hand fallacy is step one. Here’s how to avoid letting it derail your finances:

• Stick to Your Strategy: Whether you’re investing or betting, set rules and limits before you start. Don’t let a few wins sway your discipline.

• Review Your Results Objectively: Use tools like the ATO’s myTax or portfolio trackers to analyse whether your wins are due to skill, luck, or market trends.

• Stay Updated on Policy: In 2025, ASIC has ramped up warnings on high-risk trading and betting apps. Many platforms now provide pop-up reminders about the risks of chasing wins—take them seriously.

• Know When to Walk Away: Set profit (and loss) limits in advance. If you hit them, step back. The next outcome is no more likely to be a ‘win’ just because you’ve won before.

• Seek Diversity, Not Streaks: Diversifying your investments and activities helps manage risk and avoids overexposure to one ‘hot’ sector or game.

Remember, successful long-term investors and punters focus on probability, not past streaks.

The Bottom Line: Cool Heads Beat Hot Hands

In the fast-moving financial landscape of 2025, the hot hand fallacy can be a costly trap for Australians—from crypto traders to casual punters. By staying aware of this cognitive bias, setting clear strategies, and focusing on the long game, you’ll give yourself a far better shot at financial success—no luck required.