In the experiment we employ three information treatments. Each of these treatments is hypothesized to be conducive to the force of one of the three dynamic rules. To a large extent, the results are consistent with the hypothesized relationships between treatments, dynamic rules, and outcomes. An experimental investigation of recency and the hot hand effect. A substantial body of empirical literature provides evidence for overreaction in markets.
Past losers outperform past winners in stock markets as well as in sports markets.
Two hypothe- ses are consistent with this observation. First, the recency hypothesis states that traders overweigh recent information. Thus, they are too optimistic about winners and too pessimistic about losers. Second, the hot hand hypothesis states that traders try to discover trends in the past record of a firm or a team, and thereby overestimate the autocorrelation in the series. An experimental design allows us to distinguish between these hypotheses.