For as long as most people can remember, a Thanksgiving tradition has been watching football before, during or after dinner. Football today, as much as baseball, can probably be considered one of America’s pastimes. The game dates back to the late 1800s, and (as is the case with baseball) improvements in technology over the last 30 years have allowed statisticians to crunch and provide all manner of data on players, teams, coaches, and more.
The same statisticians can very easily provide dizzying amounts of data on situational analysis—the types of plays that work best in certain down and yardage scenarios. Accordingly, coaches should be well equipped to make the best play-calling decisions—based on probabilities—most of the time. Yet, very often, coaches make seemingly irrational decisions, taking the “safer” approach, even if it flies in the face of what the data tell them they should do. Why?
As Wired magazine writer Jonah Lehrer so eloquently put it: “Although we’d always seen ourselves as rational creatures—this was our Promethean gift—it turns out human reason is rather feeble, easily overwhelmed by ancient instincts and lazy biases. The mind is a deeply flawed machine.”
What does that mean? We aren’t capable of blocking out all emotion and thinking in a purely rational manner—many times, and despite our best efforts, our survival instincts get the better of us. We see this happen in what psychologists Daniel Kahneman and Amos Tversky call loss aversion—in short, losses hurt more than equivalent gains feel good. It’s loss aversion that causes coaches to mechanistically punt on fourth down instead of trying to convert—even in situations where the odds clearly favor going for it. But more often than not, most coaches decide it’s better to be safe than sorry, and pass on a favorable conversion opportunity in exchange for conservatism in field position.
Some investors do the same, thinking it’s better to be safe and sit in cash or bonds in all situations. So despite what history and extensive amounts of data show (e.g., stocks go up more than down over time, stocks typically have higher returns than bonds over time, etc.), the slightest hint of market volatility will trigger loss aversion in some investors and cause them to abandon their stock strategies in search of “safer” alternatives.
For more on loss aversion and how psychology can affect investing decisions, see Michael Hanson’s 20/20 Money.