Losers, winners, and biased trades

When faced with sequential information, consumers tend to fall prey to one of two well-known heuristics: the hot (or cold) hand and the gambler's fallacy. The authors relate these two traditionally separate heuristics to differences in accepting (buy) versus rejecting (sell) decisions. They identify trend length as a contextual moderating variable and show an asymmetry between buying and selling frames. When applied to a stock market context, a consistent finding is that consumers prefer to buy past winners and sell past losers even when neither should be preferred. This behavior violates the normative rule of buy low and sell high.