I recently read an article from a Financial Research Company that recommended dollar cost averaging when contributing to your retirement plan and I started to wonder if some of their findings applied to sports investing. They said investors need to learn to offset their fear of investing loss by contributing a set amount every payday, this concept is known as dollar cost averaging.
In all but affairs of the heart, research indicates that you make your best decisions - especially financial decisions - when you are emotionally detached. The efficiency of being unfeeling was demonstrated dramatically in a study conducted by the Stanford Graduate School of Business, Carnegie Mellon University and the University of Iowa and published in 2005.
In the study forty-one participants were given $20 apiece to play a game of chance. At the start of each round, they had to decide whether to risk $1 on the toss of a coin for a chance to win $2.50. Each player was given the option of taking part in a round; the most logical approach was to participate in each round because the potential return far outweighed the risk of loss.
Here is where the study took a rather unique twist and where I believe it has a direct correlation to sports investors: 15 of the players had suffered damage to the areas of the brain that affect emotions. Those individuals played in 84 percent of the rounds and finished with an average of $3 more than the others, who played in just 58 percent of the rounds. Why did a majority of the players irrationally take fewer risks? In a word, fear. More specifically, fear of loss. They more intensely felt, and could not suppress, a fear of loss.
According to “behavioral economics,” most of us are all-to-human – not the rational individuals theorized by traditional economics – and primarily motivated by fear of loss. The credibility of behavioral economics was given a boost in 2002 when a Princeton University psychology professor was awarded the Nobel Prize in economics (they give those for more than Peace) for research that found most people fear losses more than they desire gains. Indeed, he quantified the emotional dominance of fear. “Losses hurt 2.25 times more than gains satisfy.”
Media accounts of market swings may agitate this strong fear of loss and cause you to jump in and out of the market at the wrong times. The media was recently taken to task for its “fixation” on the Dow Jones Industrial Average. The senior editor of Investment News argued that “the Dow” as it is known, is a more volatile and less accurate barometer of the total market than the many other indexes.
This is also true in sports investing as we see sports news outlets such as ESPN, SI, Fox Sports, etc hype teams such as Alabama last year in college football and then look what happens. Each year there are a handful of teams that are on your television 24/7 but actually hold very little investment value when it’s all said and done. Allowing the sports media and your own home team bias to influence your investment strategy can be very costly in the end.
The academics have established what we have always known. Most investors do the wrong thing at the wrong time. Junk business news, with its Dow bias, only compounds the problem just as Sports Junk news causes the public to back the wrong team in most cases. It’s easy to say leave your emotions out of your investing decisions but they always find a way to creep back in and your bias continually leaves you with a much smaller bankroll then when you began.
Just as we should keep our own bias and fear of loss out of our financial decisions we must find a way to do the same when investing in the Sports Marketplace. Success can be found by using intelligent and disciplined investment strategies that are not based on opinions from behind the sports desk.
Cajun Sports Wire