How investors can learn from Tiger Woods: the human foible of loss aversion

Investors can learn a thing or two from the human foibles displayed by Tiger Woods, according to new research by academics at the Wharton School of the University of Pennsylvania. The research refers, however, to his tendency to be too risk-averse when ahead for a putt, rather than his recently exposed sexual escapades. Woods and his fellow leading golfers in the world unnecessarily forego about one stroke per 72-hole tournament, which equates to a combined loss of $1.2 million in prize money for the top 20 golfers.

Golfers – even the best golfers – may be like investors in that they avoid the possibility of loss by playing conservatively when they have the opportunity to do better than par but will try harder if they are at risk of coming in worse than par.

The researchers, professors Devin Pope and Maurice Schweitzer of Wharton, have published a working paper: “Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition and High Stakes”.

The paper explores loss aversion by providing evidence that people work especially hard in order to avoid losses, ultimately to their cost.

The researchers were able to use a rich dataset compiled by the Professional Golfers’ Association, based on between 40 and 50 tournaments a year in which 150 golfers compete. To get the information the PGA mounts lasers around each hole to measure the coordinates of each ball after every shot. The research involved 239 tournaments between 2004 and 2009 and 2.5 million putts by 421 professional golfers.

The approach to each hole taken, relative to par (the number of shots a professional should take to complete each individual hole) provides a way to measure loss aversion. The PGA data enabled the researchers to determine whether and when a golfer played it safe by making a putt that ended up just in front of the hole to set up an easier next shot.

Measuring the force of the shot and position of the ball before the putt they determined that on average the golfers made their ‘birdie’ putts (which would give them a one-under-par score for the hole, against a ‘bogey’, which is one over par) 2 per cent less frequently than they made comparable par putts.

In a note accompanying the working paper produced by Wharton, Schweitzer says the behaviour reflects the bias towards avoiding loss –  in this case missing par and scoring a bogey – over the potential to score more in the overall tournament, which is what ultimately matters.

“Loss aversion is the systematic mistake of segregating gains and losses – evaluating decisions in isolation rather than in aggregate – and over-weighting losses relative to gains,” he says.

The lessons for investors are that, if they similarly focus on the short-term periods of, say, an investment quarter rather than several years – equivalent to one hole rather than the whole course – they are likely to come up short.

And when they are “in front” with their performance, they may become too risk averse. This might have particular implications for fund managers approaching the end of a financial year for which they will get a performance fee.

The authors have also provided anecdotal evidence from Tiger Woods to add to their research. They quote him saying: “Any time you make big par putts, I think it’s more important to make those than birdie putts. You don’t ever want to drop a shot. The psychological difference between dropping a shot and making a birdie, I just think it’s bigger to make a par putt.”

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