Personal Finance and Football: Using the “beautiful game” to avoid shooting yourself in the foot
Whether you are a football fan or not, this November, it will be hard to escape the World Cup news. In addition to the sporting virtues of this discipline, it offers us an interesting reading key for the management of our personal finances, especially when it comes to shots on goals happening at the end of some matches.
Goalie or personal finance custodian: finding similarities
Football goal shootings are of great interest to financial psychology researchers because of their similarities to financial decision-making. Indeed, in both cases, whatever the preparation work - for some, watching previous matches of the opposing team to know the habits of the shooters; for others, a thorough reading of various and varied financial studies- a decision must be taken in a context of uncertainty. Thus, when a shot on goal happens, the combination of the small distance (only 11 meters from the goalkeeper) and the speed of the ball - more than 100 kilometers per hour - makes it necessary for the goalie to make an instant decision to try to prevent an opposing goal - according to the studies, the ball travels the distance in 0.2 to 0.3 seconds…and this, avoiding the «pollution» by considering a possible trajectory of the ball. The goalie must therefore decide whether to dive - or not… like a potential investor(1) who must decide to complete a transaction (or not).
The most comprehensive academic study on the subject(2) shows us that in 94% of cases the goalkeeper dives either right or left. However, the same study mentions that 28% of shots are directed towards the center, while the goalkeeper would stay there in only 6% of cases! Why does the goalie dive almost systematically and why doesn’t the shooter target the center even more? The answer to these questions lies in what is called the “action bias”, which is defined as the belief that it would always be better to act than not. This bias encourages the goalie and attacker not to stay near the centre of the net - goalies who do not dive to the side “do not go to any trouble”; attackers who aim at the middle of the goal “do not maximise the chances on their side”.
By succumbing to the pressures (expectations of the public and their teammates) not to stand still, the goalkeeper dives and fully enters into the action bias. In the financial field, one finds this harmful trend when the investor prefers to sell his or her securities in a noisy market rather than wait the storm is over, or when he or she prefers to participate in a valuation bubble because he or she can’t resist to fashion. In terms of personal finances, the action bias pushes investors to act without patience and to carry out too many transactions, the costs of which can substantially put a strain on performance!
Emotions, a factor that weights on the sports field as well as on personal finances
The literature on goal shooting is quite dense and has also focused on emotions, through pressure(3). In this respect, the goalie’s place is more enviable because he or she is not expected to stop the shot (80% of shots on goals reach the nets).
Although the sequence of the five shots may - depending on the team starting - affect the pressure of the shooter, whose shot will either score to avoid defeat or to allow victory, it is by no means decisive for the results at the end. On the other hand, the drop in the success rate of the shooters between the first (80%) and the fifth (70%) shots testifies to the reality and the increase of the pressure over the shots. Beyond slightly lower success rates in penalty shootings to tie teams than for a simple penalty, studies indicate that only 80% of penaltys would be registered in matches - with lower rates for “superstars”, who undergo more pressure - against 90% during training.
The analogy of managing one’s personal finances is straightforward: it is easier to manage a fictitious portfolio than to tackle the real management of one’s finances, in which bets have real consequences. Decision-making on the sports field or in personal finances is marked by emotions that one must be freed of to succeed!
According to research(4), the performance of the national indices would be correlated with that of the country’s team: this is undoubtedly another good reason to be attentive during shots on goal!
(1) In this article '"investor" refers to individual client.
(2) Action bias among elite soccer goalkeepers: The case of penalty kicks, 2005 - https://mpra.ub.uni-muenchen.de/4477/1/MPRA_paper_4477.pdf
(3) Decision Under Psychological Pressure: The Shooter's Anxiety at the Penalty Kick, 2018
(4) For example: Economic impact of national sporting success: evidence from the London stock exchange, 2003 or Sports Sentiment and Stock Returns, 2007
WARNING
This document is an advertisement and has no contractual value. Its content is not intended to provide an investment service, nor does it constitute investment advice or a personalised recommendation on a financial product, nor insurance advice or a personalised recommendation, nor a solicitation of any kind, nor legal, accounting or tax advice from any entity under the responsibility of Société Générale Private Banking.
The information contained herein is provided for information purposes only, is subject to change without notice, and is intended to provide information that may be useful in making a decision. Past performance information that may be reproduced is not a guarantee of future performance.
Before subscribing to an investment service, financial product or insurance product, the potential investor (i) must read all the information contained in the detailed documentation for the service or product in question (prospectus, regulations, articles of association, key investor information document, term sheet, information notice, contractual terms and conditions, etc.), in particular those relating to the associated risks; and (ii)consult his legal and tax advisors to assess the legal consequences and tax treatment of the product or service being considered. His or her private banker is also available to provide further information, to determine with him or her whether he or she is eligible for the product or service under consideration, which may be subject to conditions, and whether it meets his or her needs. Accordingly, no entity within Société Générale Private Banking can be held responsible for any decision taken by an investor solely on the basis of the information contained in this document.
This document is confidential, intended exclusively for the person to whom it is given, and may not be communicated or brought to the attention of third parties, nor may it be reproduced in whole or in part, without the prior written consent of Société Générale Private Banking. For more information, click here.
In this merry month of December, we take a look at the letters sent to the man himself and consider the behaviours they...
Focus on Wealth Planning #4: Philanthropy
Healthcare real estate is undergoing a transformation, driven by major demographic, technological, and economic changes....
Focus on Wealth Planning #2: Protection of a surviving spouse
Focus on Wealth Planning #3: The Dutreil Pact