Sunday night’s football game between the Patriots and the Colts was one for the ages. Two future Hall of Fame quarterbacks on the two winningest teams in recent years faced off. Ultimately the game turned on a decision that had to be made by the Patriots’ coach, Bill Belichick. The Patriots had a fourth down with two yards to go deep in their own territory. If they succeeded in getting it, they could run out the clock and win the game. If they failed, the Colts would have the ball and enough time to score.
A statistician cited in the Wall Street Journal article about the play points out that the numbers are clear. The Patriots had a 79% of winning the game by going for it on fourth down, either by converting or by stopping the Colts from scoring afterwards, but only a 70% chance of winning if they had to stop the Colts from driving down the field after a punt. The Patriots, going with the numbers, elected to go for it, failed, and ended up losing the game.
The most interesting thing about the decision was not that the Patriots went with the odds and ended up with the short end of the stick. The interesting thing is how vocal fans and the sports press have been about Mr. Belichick’s “bad” decision.
The kind of thing comes about because people have a tendency, in matters of probability, to confuse decisions and outcomes. The Patriots indeed had a bad outcome, but the decision seems to have been statistically correct. The reason that people are responding to the decision so harshly has to do with the cognitive bias of regret avoidance. The Wall Street Journal article points this out very nicely:
In a recent study, researchers from Duke and UCLA found that when faced with a decision involving risk, people have an overwhelming tendency to make the supposedly safe choice—to err on the side of caution—even though doing so may lead to worse results.By studying thousands of hands of blackjack played by random people, the researchers found that when they strayed from the “book” or the optimal strategy, those players who did something aggressive were more successful than those who did something passive.
In fact, the subjects made four times as many passive mistakes as they did aggressive ones. And these passive mistakes—holding on a 16 when the dealer has a king showing, for example—were more costly: They cost $2 for every $1 won, versus $1.50 for every $1 won on aggressive mistakes.
Why do people embrace caution? “It’s because of the regret that people face when they take an action and it doesn’t turn out well for them,” says Bruce Carlin of UCLA’s Anderson School of Management, who worked on the study.
Think about that for a few minutes: people made four times as many passive mistakes as they did aggressive ones. And the passive mistakes were more expensive. Maybe risk aversion is not such a good idea in certain circumstances. True, it feels better because we don’t have to feel dumb if we take a risk and it doesn’t work out. Maybe feeling comfortable is overrated. If we are truly concerned about outcomes over the long run, often it makes sense to err on the side of aggressiveness rather than passivity.
One of the biggest benefits of a systematic investment process is that it is unemotional. Our process is designed to expose the portfolios to high relative strength picks-whether it feels comfortable to us or not-simply because research suggests that high relative strength outperforms over time. If you punt when the chips are down, you won’t have the benefit of the odds working in your favor over time.
