Despite evidence against the existence of the hot hand, research has repeatedly shown that individuals can be influenced by extrapolation bias. One study found that casino gamblers bet more after winning than after losing.2 In other words, they bet more after winning because they believed that their chance of winning again was greater than before. Another study showed that basketball betting markets do indeed believe in the hot hand, and that the hot hand fallacy is also at play when people think about buying and selling in financial markets.3
Economists and financial analysts assess financial markets using what economists call "base rate information" — full historical stock market data. Everyday investors do not usually have access to such information, and instead base their judgments about risk and return on "singular information" — data which is more recent or more easily obtained. Making decisions based only upon recent information compared to all of the available data can often lead investors to think current trends are the best predictors of what will happen next.
For example, during a bull market, people will expect stocks to continue to earn high returns. In a bear market, they will think low returns will continue. This is extrapolation bias at work. You have probably experienced this countless times with clients a client calls during a bull market and wants to buy, or they call during a downturn and are anxious to sell. As an advisor, it is important to recognize that extrapolation bias may be driving these clients to request exactly the opposite of what you would advise them to do.