Hot-Hand Belief and Loss Aversion in Individual Portfolio Decisions: Evidence from a Financial Experiment

Marcleiton Ribeiro Morais (), José Guilherme de Lara Resende and Benjamin Miranda Tabak
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Marcleiton Ribeiro Morais: Department of Economics, Universidade de Brasília, Prédio da FACE, Campus Darci Ribeiro, Asa Norte, Brasília CEP 70910-900, DF, Brazil
José Guilherme de Lara Resende: Department of Economics, Universidade de Brasília, Prédio da FACE, Campus Darci Ribeiro, Asa Norte, Brasília CEP 70910-900, DF, Brazil
Benjamin Miranda Tabak: School of Public Policy and Government, Fundação Getúlio Vargas (FGV-EPPG)—Asa Norte, Brasília CEP 70830-051, DF, Brazil

JRFM, 2025, vol. 18, issue 8, 1-23

Abstract: We investigate whether a belief in trend continuation, often associated with the so-called “hot-hand effect,” can be endogenously triggered by personal performance feedback in a controlled financial experiment. Participants allocated funds across assets with randomly generated prices, under conditions of known probabilities and varying levels of risk. In a two-stage setup, participants were first exposed to random price sequences to learn the task and potentially develop perceptions of personal success. They then faced additional price paths under incentivized conditions. Our findings show that participants initially increased purchases following gains—consistent with a feedback-driven belief in momentum—but this pattern faded over time. When facing sustained losses, loss aversion dominated decision-making, overriding early optimism. These results highlight how cognitive heuristics and emotional biases interact dynamically, suggesting that belief in trend continuation is context-sensitive and constrained by the reluctance to realize losses.

Keywords: hot-hand belief; loss aversion; portfolio choice; belief formation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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