Weekly Insider: (Choice, Doors & Soccer)

Luck accounts for far more than we think. But all success, in life and investing, not derived from luck—derives from rational judgment and decision making under conditions of uncertainty. Last week two interesting articles ran in the New York Times on decision making.

 

In soccer, during a penalty shot, there’s a split second from when the ball is kicked to when the goalie chooses to leap left or right to make a save. Goalies rarely stand still in the middle to make a save. As with investors, there’s a bias to action.

 

We prefer action over inaction. When there’s an economic downturn, officials are more likely to decide to ‘do something’—even if the consequences of action might make things worse than inaction. They want to avoid the criticism of having ‘done nothing’.

 

Entrepreneurs and investors with a chosen process (strategy) and disappointing outcomes (results) are often at a crossroads and must choose ‘stay the course’ or ‘switch strategies’. If staying the course works, they may save their role or their company. If it doesn’t they’re more likely to be canned for not ‘doing something’. It’s the same reason most investors sell their stocks as soon as prices move against them, focusing on outcomes instead of determining if the facts have changed and if their process is still sound.

 

As the article points out, it’s why goalkeepers are more likely to leap left or right than stand still. With tenths of a second to respond the goalie must size up the kicker and choose to jump and which way, without complete information (that is: seeing the kicked ball in trajectory). 80% of all kicks get past goalies. That’s an interesting number when you consider a similar percentage of fund managers underperforms the market.

 

The scientists studying the odds of goalies stopping kicks concluded that a goalie’s best strategy was to stay in the center (33% of the time) versus 14% to the left and 13% to the right. Based on today’s data, the goalies only stood still 6% of the time. Of course strategy can be a complex adaptive system and if kickers or their coaches read this and they know that goalies are more likely to adopt this new strategy and stand in the center, then the kickers are better off kicking left or right, unless they think the goalies think they think that. Ad infinitum.

 

The article also notes Kahneman and Tversky’s oft covered findings that people who lost money because they chose to act, have much more regret than people who lost money but left it untouched. They may psychologically blame the “market” instead of themselves for “acting”.

 

Yet this study showed the opposite: “Not acting would make someone feel a deeper emotional pang…The result is an unconscious bias toward action.”

 

Other researchers have found: “a bias toward action or inaction often depends on whether a previous result was good or bad. After a team has a big loss, for example, the expectation is that the coach should replace the starting players, whereas after winning, leaving the lineup unchanged is considered the normal response.”

 

In a separate article by John Tierney on choice, an experiment was conducted that gave people an option of picking a reward behind multiple doors. Each volunteer was given 100 clicks to invest to maximize their gain. Each door had an uncertain reward but once opened would allow the volunteers to click away to reap reward. Volunteers could click on other doors but it would cost them clicks that got used up and yielded nothing.

 

A twist was thrown in. Some of the doors that went untouched would start to shrink and eventually disappear unless clicked on. Sure enough: the thought of losing a possible opportunity (even if unused) had volunteers wasting their clicks trying to just preserve some of their options.

 

In some situations in life and investing the best strategy is to focus in and quickly determine what matters and shed other distractions which can be taxing (cognitively, emotionally and financially). As consistent with loss aversion theory: we are innately willing to pay a price to avoid the loss of an option. It’s why people pay extra money on higher end models of consumer products (like cameras or computers or TVs) with features they will never use. And why we exhaustively deliberate over tough choices. Here’s the article quoting the scientist: “Closing a door on an option is experienced as a loss, and people are willing to pay a price to avoid the emotion of loss” Even the scientist was human, “…When he was trying to decide between job offers from M.I.T. and Stanford, he recalls, within a week or two it was clear that he and his family would be more or less equally happy in either place. But he dragged out the process for months because he became so obsessed with weighing the options.”

 

All this reminds me of a quote from Eugene Kleiner as recounted by Tom Perkins (the two of the eponymous venture firm Kleiner Perkins): if a decision is incredibly difficult, it doesn’t matter what you choose.