Individual Reaction to Past Performance Sequences: Evidence from a Real Marketplace

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We use novel data on individual activity in a sports betting market to study the effect of past performance sequences on individual behavior in a real market. The idiosyncratic nature of risk in this market and the revelation of assets’ true terminal values enables us to disentangle whether behavior is caused by sentiment or by superior information about market mispricings and to cleanly test two prominent theories of momentum and reversals—the regime-shifting model of Barberis et al. [Barberis N, Shleifer A, Vishny R (1998) A model of investor sentiment. J. Financial Econom. 49(3):307–343] and the gambler’s/hot hand fallacy model of Rabin [Rabin M (2002) Inference by believers in the law of small numbers. Quart. J. Econom. 117(3):775–816]. Furthermore, our long panel enables us to study the prevalence across individuals of each type of behavior. We find that (i) three-quarters of individuals exhibit trend-chasing behavior, (ii) seven times as many individuals exhibit behavior consistent with Barberis et al. (1998) as exhibit behavior consistent with Rabin (2002), and (iii) no individuals earn superior returns from momentum trading.
Original languageEnglish
Pages (from-to)1957-1973
Issue number4
Early online date1 Feb 2017
Publication statusPublished - Apr 2018


  • Momentum
  • Individual decision-making
  • Heterogeneity
  • Behavioral biases
  • Sports betting


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