Wednesday, May 29, 2013


What is The Hot Hand Fallacy?

The Hot Hand Fallacy, also known as streak shooting, is the belief that the probability of a made shot is greater following a previously made shot rather than a miss. [1]

Irrational Belief
This belief is of course irrational. All statistical analysis collected on the subject, first conducted by Thomas Gilovich, show that the outcome of a shot has no positive correlation with the outcome of the previous shots taken. [2]

Irrational Belief that is Predictable, Pervasive, and Powerful
When asked if a player “has a better chance of making a shot after having just made his last two or three shots than he does after having just missed his last two or three shots,” 91% of fans surveyed responded “Yes.”[3] When surveyed professional players and coaches like basketball fans alike show equal levels of belief in the hot hand fallacy.[4] Moreover, these results are pervasive even when shown the data proving otherwise. When the results of Gilovich’s first studies where published the overwhelming public response was of disbelief.[5] Most famously famed Boston Celtics' Coach Red Auberbach's response to the study was, “Who is this guy? So he makes a study. I couldn’t care less.”[6]

Irrational Belief That Cannot Be Explained By Lack of Proper Incentives

One may argue that the average fan may not have the proper incentives to correct for this fallacy. After-all, the root of irrational beliefs caused by biases and heuristics is commonly (but misleadingly) believed to be a “lazy and inattentive minds.”[7] This explanation should be resisted in light of the evidence that even trained professionals are prone to the streak shooting belief. Conceivably, in the context of the multi-billion dollar NBA industry there are strong incentives to pay attention and devote full cognitive resources to understanding the phenomenon of “streak shooting.” Failure to be understand streak shooting can be costly! As Gilovich explains,
                “Passing the ball to the player who is ‘hot’ is a common strategy endorsed by basketball players. It is also anticipated by the opposing team who can concentrate on guarding the ‘hot’ player. If another player, who is less ‘hot’ on that particular day, is equally skilled, then the less guarded player would have a better chance of scoring. Thus the belief in the ‘hot hand’ is not just erroneous, it could be costly.” [8]
The occurrence of even well incentivized people still falling prey to this fallacy is not a surprise. As researchers Camerer and Hogarth have found, “no replicated study has made rationality violations disappear purely by raising incentives.”[9]

Why Does the Erroneous Belief of Streak Shooting Exist?

We Are Associative Machines Built To See Patterns Where None Exist
The hot hand fallacy is caused by the representatitiveness bias.[10] We have a positive association bias in which the likelihood of a made shot is incorrectly perceived to be greater following a made basket.[11] This occurs because we are built to see patterns where none exist. When we see two shots being hit, we assume the successive shots thereafter similarly will go in. In other words, we judge the likelihood of successive shots based on the representatitiveness of the outcomes of the most recent shot attempts. The association of the recently made or missed basket is still so fresh in our head!

We Lack the Ability to Intuitively Grasp Random Sequences
Moreover, the associative machine seeks to explain perceived abnormalities of random sequence.[12] This is because we lack the ability to intuitively grasp random sequences. [13] A random sequence is a sequence of events in which the outcome of each individual event cannot be predicted with certainty. Basketball shots are indeed random sequences similar to coin tosses.[14] The comparison seems intuitively unreasonable because the chance of a shot is dependent on other parameters which may not be the same in every instance, such as defensive intensity, player skill, and shot selection.[15] Nevertheless, the probability of each individual shot is largely independent on the outcome of the previous shots taken.[16]  Similarly with coin tosses, although the probability of getting heads when you flip a coin is dependent on other parameters such as “the initial position of the coin, and it’s angular and vertical momentum,” it is nevertheless independent on the outcome of the previous flips taken.[17]
Like a random sequence of shots resulting in 3 baskets made in a row, it is not inconceivable (and in fact quite probable) to have a random sequence of coin flips come up heads 3 times in a row. However, our associative machine upon viewing such a pattern inaccurately seeks to make use of this seemingly logical pattern within the random sequence, leading us to a mistaken perception on how random sequences work.

Findings Do Not Make Basketball a Game of Chance, and Not Skill

Of course, these findings do not make basketball a game of chance as oskill.[18] It merely means that the likelihood of a make on successive shots is independent of the outcomes of the previous shots taken.[19] Strategy, skill, and other variables still play a part in deciding which shots to take and the likelihood you are to make it.[20]

The hot hand fallacy is just one of many ways in which a better understanding of behavioral science can help us. Failure to be aware of this heuristic based misperception of streak shooting can be costly. Nevertheless people, even in positions of great incentive, fail to consciously adjust their intuitive assessments in light of the research. In other words their system 2 (conscious thought) refuses to reassess the faulty information provided to them by their system 1 (subconscious thought, also known as intuition). They consciously reject the teachings of behavioral science in favor for beliefs that reconcile with our desire to see patterns, leading to incorrectly believing in the phenomenon of streak shooting. Therefore there is arbitrage to be had by those who do accept the teachings of behavioral science. In a world where every advantage helps, perhaps refusing to adopt strategies based on irrational beliefs can provide the necessary winning edge.

[1] Thomas Gilovich, Robert Vallone & Amos Tversky, The Hot Hand in Basketball: On the Misperception of Random Sequence, 295-314. 296 (1985).
[2] 295. In relevant part: “detailed analyses of the shooting records of the Philadelphia 76ers provided no evidence for a positive correlation between the outcomes of successive shots. The same conclusions emerged from free-throw records of the Boston Celtics, and from a controlled shooting experiment with the men and women of Cornell’s varsity teams. The outcomes of previous shots influenced Cornell players’ predictions but not their performance.” The different tests where done to control for and eliminate the various factors surrounding a shot such as skill, defensive intensity, and shot selection.
[3] Id. at 297.
[4] Id. at 310. In relevant part: “[Discussing surveyed 76ers players] Most of the players (six out of eight) reported that they have on occasion felt that after having made a few shots in a row they ‘know’ they are going to make their next shot-that they ‘almost can’t miss’… All of the players believed that it is important ‘for the players on a team to pass the ball to someone who has just made several (two, three, or four) shots in a row.’ Five players and the coach also made numerical estimates. Five of these six respondents estimated their field goal percentage for shots taken after a hit (mean: 62.5%) to be higher than their percentage for shots taken after a miss (mean: 49.5%).”
[5] Daniel Kahneman, Thinking Fast and Slow, 172.
[6] Id.
[7] Thomas Gilovich, Dale Griffin, & Daniel Kahneman, Heuristics And Biases, 1-20, 2 (2002), The Psychology of Intuitive Judgment. In relevant part: “Automatic or Deliberate? There is another dichotomous aspect of the heuristics and biases approach that warrants discussion. Heuristics have often been described as something akin to strategies that people use deliberately in order to simplify judgmental tasks that would otherwise be too difficult for the typical human mind to solve. This use of the term fits with the ‘cognitive miser’ metaphor that proved popular in the field of social cognition (Fiske & Taylor, 1991). The metaphor suggests, perhaps unfortunately and unwisely, that the biases documented in the heuristics and biases tradition are the product of lazy and inattentive minds. The implication is unfortunate and potentially misleading because the biases identified in this tradition have not been appreciably reduced by incentives for participants to sit straight, pay attention, and devote their full cognitive resources to the task. After reviewing 74 studies, Camerer and Hogarth (1999) concluded that incentives can reduce self-presentation effects, increase attention and effort, and reduce thoughtless responding, but noted that ‘no replicated study has made rationality violations disappear purely by raising incentives.’”
[8] See Gilovich Hot Hand, supra note 1, at 313.
[9] See Gilovich Heuristics & Biases, supra note 7.
[10] See Gilovich Hot Hand, supra note 1, at 296.
[11] Id. at 296
[12] See Kahneman, supra note 5, at 169.
[13] See Gilovich Hot Hand¸supra note 1, at 311. In pertinent part: “We attribute this phenomenom to a general misconception of the laws of chance associated with the belief that small as well as large sequences are representative of their generating process. This belief induces the expectation that random sequences should be far more balanced than they are, and the erroneous perception of a positive correlation between successive shots.”
[14] Id. at 297. In relevant part: “It may seem unreasonable to compare basketball shooting to coin tossing because a player’s chances of hitting a basket are not the same on every shot. Lay-ups are easier than 3-point field goals and slam dunks have a higher hit rate than turnaround jumpers. Nevertheless, the simple binomial model is equivalent to a more complicated process with the following characteristics: Each player has an ensemble of shots that vary in difficulty (depending, for example, on the distance from the basket and on defensive pressure), and each shot is randomly selected from this ensemble. This process provides a more compelling account of the performance of a basketball player, although it produces a shooting record that is indistinguishable from that produced by a simple binomial model in which the probability of a hit is the same on every trial.”
[15] Id.
[16] Id.
[17] Id. 312-313.
[18] Id. at 312.
[19] Id.
[20] Id.

Sunday, May 19, 2013

Arab Money: Is Islamophobia Preventing U.S. Access to Cash-Rich Investors?

Arab Money: Is Islamophobia Preventing U.S. Access to Cash-Rich Investors?

Mushfique Shams Billah, current Sullivan & Cromwell legal associate, wrote one of the more interesting law review articles I have come across. It is interesting because of the insight and also because it may be the only law review article that starts out by quoting Busta Rhymes.
“Bismillahir rahmanir rahim, Alhamdu lillaahir rabiil’alamin, We gettin’ Arab money, We getting’ Arab money.” – Busta Rhymes – Arab Money Remix[1]

In his note tilted “Arab Money: Why Isn’t The United States Getting Any?,” Billah questions the continual U.S indifference towards the increasingly important role that Islamic Finance has in international finance. 

Islamic Finance: What is it?

In order to discuss this paradox, it is important to first understand what Islamic Finance is. “Islamic Finance attempts to reach the same substantive outcomes as conventional finance but in forms that comply with the concepts underlying the Shari’ah and the divine laws of Islam.[2]” So, how does Islamic Finance differ from conventional finance you ask? Well…depends on who’s asking. If it’s an investor asking, the answer is it differs in many crucial concepts involving risk and asset ownership. If it’s a layman asking, the answer is…well, the end result is pretty identical. However, to those that wish to conduct business in a manner that accords with their religious beliefs the differences can be quite substantial and substantive[3]

Sharia-Law Backlash

Billah in his article focuses on the statutory and constitutional frameworks that have come to present obstacles for Islamic finance transactions in the U.S. I, however, wonder whether the lack of zeal in fixing these obstacles aren’t more rooted in Islamophobia  –or more aptly put, the recent phenomenon of an irrational concern with Sharia Law penetrating American culture. 

Opponents are concerned Sharia Law is permeating into America and might cause “homegrown terror. [4]” To date over a few dozen states have reacted to public sentiment by affirmatively moving to ban Sharia Law[5]. While some critics focus on the notion that Islamic finance promote terrorism others are concerned that Islamic Finance would violate our principles of separation of church and state. Specifically one plaintiff has gone as far to allege that TARP funds received by an institution with Sharia-Compliant products are a violation of the Establishment Clause. 

Constitutional Challenged Shot-down

Murray v Geithner was a challenge in the Southern District Court of Michigan to see whether the EESA violated the Establishment Clause by allowing funds to be appropriated to financial entities that have Sharia-compliant products[6]. The EESA is the authorizing bill that spawned the creation of the Trouble Asset Relief Program (TARP).[7] Murray challenged the government’s assistance to American International Group (AIG) through TARP on the basis that some of these funds would be used to assist their Sharia-based products, in which they argued would be a violation of the Establishment Clause. [8]

Judge Lawrence P. Zatkoff made quick work of this challenge, disposing of it in summary judgment under the Lemon Test.[9] The lemon test states that a statute will be upheld under the Establishment Clause if,  “1) it has a secular legislative purpose, 2) its principal or primary effect neither advances nor inhibits religion, and 3) it does not foster an excessive government entanglement with religion. [10]” Judge Zatkoff found for AIG in all 3 elements. Specifically, under the first and most important element – secular purpose – Judge Zatkoff ruled that the plaintiff failed to produce sufficient evidence to conclude that the primary purpose of the EESA was to advance religion.[11] Judge Zatkoff noted the defendant’s evidence that Shari’ah-Compliant products accounted for less than .03% of AIG’s consolidated revenue.[12] While this case was dispensed on the basis of a failure to the produce evidence to defeat a motion of summary judgment, it is likely the court found persuasive the defendant’s argument. AIG contended that EESA had, not a religious purpose, but a “secular purpose of restoring liquidity and stability to the financial system of the United States.”[13]
Backlash Misguided

Critics concerned about a violation of the establishment clause can be placated by Judge Zatkoff’s analysis of the Lemon Test. And those concerned about Islamic Finance causing “homegrown terrorism” can be dismissed outright as too fringe of a group to be taken seriously. What about those concerned with the moral implications of allowing Shari’ah law in the U.S? It would be disingenuous to not acknowledge the implicit association that drive most of the paranoia surrounding Islamic Finance in the U.S; the deplorable laws and principles that have been proclaimed in the name of Islam around the world. Being the associative machines we humans are, it is tempting to get unhinged by the extreme examples primed in the media of Sharia'ah law. However, in order to remain grounded in reality, it is important to stay focused on the implications of critics’ fears. Will Islamic Finance usher in an era of tolerance for female genital mutilation or honor killings in the U.S? Highly unlikely.  Will allowing Islamic Finance open a pandora’s box of foreign law usurping American public policies and norms? Again, quite improbable. From a common sense perspective the answer to these two questions is readily apparent. From a legal perspective it is similarly as evident. No matter how grandiose our desires of comity, cultural acknowledgement, or international reciprocity of law grows as a nation, no contract will be upheld by a U.S court that violates our constitution, congressionally enacted laws, or our norms of decency and public policy.

Islamic Finance is not some foreign concept or application of laws not already applicable within ordinary U.S contract laws. It is merely contractual agreements, bound by the same rules and laws as other contractual agreements. But what Islamic Finance does provide that conventional finance doesn't is the substantive benefit of allowing greater market participation by Muslims across the world, which in turn can only lead to greater global financial integration. As demand for Islamic bonds (Sukuk) continue to go unsatisfied, cash-rich Islamic investors continue to have too few investment opportunities[14]. With so much demand to be met it would be a benefit to both the interests of the U.S and Islamic followers to damper our resistance and join the Islamic Finance frontiers.

[1] Mushfique Shams Billah, Arab Money: Why Isn't the United States Getting Any?, 32 U. Pa. J. Int'l L. 1055, (2011).
[2]Kalu Kalu, Islamic Finance: Due Diligence in Shari’ah Compliant Transactions (2013). Available at
[3] Note that even amongst followers of Islam there is a lively debate about whether Islamic Finance as practiced is indeed Halal. See
[5] Id.
[6] Murray v Geithner., 763 F.Supp.2d 860 (S.D. Mich. 1992).
[7] Id. at 862.
[8] Id.
[9] Id. at 865.
[11] Id. at 866.
[12] Id.
[13] Id.