Hot Hand Fallacy: Why Should I Retire?

Published: January 26, 2017 at 9:52 am

Last Updated on November 25, 2021

Nearly 11 years ago, I sat down to face my IIT, Madras faculty interview. One of the faculty members who I knew from my student days sat beside me as he was waiting for his promotion interview. When he found out that was a particularly troubled time for me he said, “Pattu, I am glad that you facing so many hardships at such a young age. It will give you the necessary maturity to handle the problems that you will face later”.

At that time, I was not impressed by that. But today, I can truly appreciate the depth of that statement. The reason I bring it up, is when there is a discussion on planning for future financial needs, especially retirement, often someone says, “why should we retire? why can’t we keep working for as long as we can?”

Sure we can if life is a fairytale. Who does not want to be “active” until they die? Just because we wish it, does not mean life will accept!

The reason we need to take retirement seriously is not because we need to stop working after a “certain age”, but because we may be unable to work anytime from now.

Consider this: Five years ago, at age 38, at the peak of my fitness (I had just lost 20+ Kg), never having been sick for the past 15 years, I thought if I maintain a healthy lifestyle, I should do “all right”. Then like a switch, I got an auto-immune condition, that still prevents me from working full time. Had I been in a corporate set up, I would have been forced to retire.

Retirement planning is a form of insurance.

Just because we have enough corpus saved up, does not mean we need to quit working and rot away. And just because we are active and productive today, does not mean we will continue to be in the years to come.

We are all victims of our experiences.

“Victims” because good (or bad) experiences in the past make us extrapolate that to the future. Victims because this can lead us to make bad choices/decisions. Our optimism or pessimism depends on our past.

I have seen many people assume that their life would turn out like an Excel sheet and that they would cross a bridge when they get to it. When it comes to money management, we need to prepare for known bridges and have contingency plans* for unknown bridges.

*: emergency fund, life insurance, health insurance etc.

Optimism is not a bad idea at all, but one cannot afford to be that optimistic that there is no plan “B”.

Plan “B” (C,D,E ..) are all part of the pessimism package 🙂  Many readers have called me a pessimist or a conservative investor. This is because I am a victim of my experiences.

What is hot hand fallacy?

A gambler who has won the first four rounds believes that she cannot lose the fifth. So much that she fails to consider the consequences – earnings from the first four are wiped out. Not just gamblers, we all suffer from it.

Note: The hot hand fallacy is often associated with basketball.

Whenever I write a post suggesting X or Y or Z has risks with it, someone always comments, “I have been doing it for so many years, and never had problems with it” – hot hand fallacy.

“Individual investors can always beat mutual fund managers because I have done it”.

“ELSS mutual funds have always beat PPF, and therefore they always will”

“Liquid funds have beat fixed deposits with 9% returns”

“Why do you expect only 10% from equity, equity mutual funds have offered 18% returns in the last 10 years?”

Every asset bubble that we have seen is due to a hot hand fallacy.

If you want more examples, come be part of FB group, Asan Ideas for Wealth. It rains hot-hand fallacies there.

As for me, I suffer from cold hand fallacy: when I said “s**t can happen”, my wife corrected me, “s**t will happen”.

Everyone has a plan until they get punched in the face! – Mike Tyson.

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Pattabiraman editor freefincalDr. M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice.
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Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
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