The hot hand fallacy is generally prevalent in information-driven decisions and calculated risk-taking choices. While gambling fallacious behavior is common in investors who approach the stock markets as gamblers. This paper aims to examine the presence of Gambler’s or hot hand fallacy in the Islamic stock market.
This study calculated a relative strength index for 6 and 14 periods and applied it to the daily Jakarta Islamic stock index ranging from 2 January 2010 to 12 September 2024. This study computed dummy variables based on the RSI to track consecutive gains and losses. This study estimated their impacts in both price and trading volumes regressions using ordinary least squares (OLS), Quantiles and wavelet regressions. This study applied Shannon transfer entropy to explore the causality between overbought/oversold scenarios and the Jakarta Islamic index.
This study divided the data into oversold and overbought scenarios, the positive (negative) impact of overbought (oversold) conditions is found to be statistically significant in price regression. Only oversold conditions came out to be statistically meaningful in a trading volume regression. Accordingly, results show evidence of the hot hand fallacy in the Jakarta stock market. The effects observed across quantiles exhibit heterogeneity, being insignificant for certain quantiles while corroborating the findings from OLS analysis. Additionally, the wavelet regression reveals a comparable impact, which demonstrates significant effects at high frequencies, specifically for periods not exceeding one week.
This study results have valuable implications for policymakers, revealing that investors do not have a mere short-term focus and obsessively chase quick outcomes. While not disregarding long-term value beyond mere chance or speculation, they may potentially influence market’ dynamics.
This study directs the attention to a less-studied domain of behavioral biases in Islamic stock markets, with a particular focus on the Jakarta Islamic Index (JII). While earlier investigations have explored behavioral biases in general stock markets and other biases in Islamic finance, this study addresses a critical gap by examining the gambler’s fallacy and the hot hand fallacy within a Shariah-compliant market.
