The Loser's Curse
A few months ago, during the NFL draft in late April, I heard an interview on the radio with Richard Thaler, an economist from the University of Chicago who described the role that behavioral economics plays in the draft.
He authored a piece called "The Loser's Curse: Overconfidence vs. Market Efficiency in the National Football League Draft" in 2005 with Cade Massey of Duke University.
It is a fascinating piece, and if you do not care to read or skim through it like I did, the abstract of it is that they address a question of increasing interest to researchers in a variety of fields as to whether the incentives and experience present in many “real world” settings mitigate judgment and decision-making biases.
To investigate this question, Thaler and Massey analyze the decision making of National Football League teams during their annual player draft. This is a domain in which incentives are exceedingly high and the opportunities for learning rich. It is also a domain in which multiple psychological factors suggest teams may overvalue the “right to choose” in the draft – non-regressive predictions, overconfidence, the winner’s curse and false consensus all suggest a bias in this direction.
Using archival data on draft-day trades, player performance and compensation, they compared the market value of draft picks with the historical value of drafted players. They find that top draft picks are overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research.
Painstakingly, Thaler and Massey analyzed the performance of many players over many years in respect to their original draft position.
After much analysis, their modest claim in this paper is that the owners and managers of National Football League teams are also human, and that market forces have not been strong enough to overcome these human failings.
"The task of picking players, as we have described here, is an extremely difficult one, much more difficult than the tasks psychologists typically pose to their subjects. Teams must first make predictions about the future performance of (frequently) immature young men. Then they must make judgments about their own abilities: how much confidence should the team have in its forecasting skills? As we detailed in section 2, human nature conspires to make it extremely difficult to avoid overconfidence in this task."
Why mention this?
First, because I have bore witness to many horrible drafts as a Chicago sports fan, even more by the Bulls than the Bears, and many horrible picks by the Cubs before Theo came to town to save us.
I believe that the Bears suffer from the Loser's Curse when it comes to their draft picks year after year, not having drafted well since Kyle Long in 2013 and Matt Forte and Earl Bennett way back in 2008. If you look at their draft picks over the past ten years, only a few became viable NFL players for more than a few years.
When it comes to the Bulls, well, I do not recall them making a good pick since Jimmy Buckets in 2011 or D-Rose fell into their lap with the first pick in 2008. Taj Gibson was a pretty good pick in 2009, so the brain trust of GarPax traded him and draft bust Dougie McDermott to the Oklahoma City Thunder for the worst three players on their team late last season. If that is not a manifestation of the Loser's Curse, I am not sure what is.
Note: I am updating this post in August 2018 and think that GarPax may have hit on something with Laurie Markanen. We shall see...
My prediction is that Cameron Payne will not become a viable player in the next two seasons, and then GarPax will be forced to quietly move him along.
My second reason for mentioning my reading of this study is that it led me into a larger overall delving into the topic of behavioral finance. Not a typical blog topic, I know, but a fascinating one nonetheless. And one that pertains strongly to money.
I researched the topic further, coming across a paper by UCLA Professor Dr. Shlomo Bernatzi, whose name I recognized from an article that I read and wrote about in my last post about my preference to receive $5,000 per month instead of a cool million bucks.
Behavioral Finance in Action
I read Behavioral Finance in Action, a paper by Benartzi written in 2012 for Allianz Global Investors Center for Behavioral Finance. You will no longer find it posted on the Allianz website, but can access it at the above link on the Majestic Asset Management site.
Benartzi writes that many young people view their older selves heading into retirement as strangers.
The disconnection between our present and future selves is well recognized, and it correlates with a reluctance to save money for our future selves.
I, myself, suffered from this misconception for many years. During my twenties, I do not recall consciously knowing or caring that retirement existed. In my thirties, I thought that somehow I would become wealthy by identifying some chance or opportunity that would present itself. Up until that time, I largely gained whatever modicum of success that I had obtained by acting upon opportunities that were presented to me.
In the nearly eighteen years since I turned the big 3-0, I have either not received such opportunities to become wealthy or I have failed to recognize them.
My brother did propose starting a trading firm, just the two of us, when he was laid off from a law firm in the throes of the Recession, but I took what I thought was the more prudent and safer course, and kept the economic development position that I remain in today.
I do not think that we would have made it big in the trading world, but I will never really know.
Perhaps we would both be millionaires today had I decided to take the plunge. More likely, I could have suffered massive financial losses, destitution, divorce and other disastrous results.
In any case, I never did make it rich. I continue plugging away and working hard at a difficult position and strive to continue remaining a gainfully employed member of the American middle class. I pay my bills and support my family, yet we never make it very much ahead of the curve despite my efforts.
I recognize that I hope to remain alive for many more years and, if I am successful at remaining among the living along with my wife, the future us will require plenty of U.S. currency in decades to come to carry us through and allow us to maintain a decent lifestyle.
The Future You...
Hal E. Hershfield, Daniel Goldstein and five colleagues wrote an article titled "Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self" for the Journal of Marketing Research in November 2011.
It was another thought-provoking article, in which the authors wrote that one might feel more connection to one's future self in one year than one's future self in 40 years and at the extreme, with a total lack of psychological connectedness, one's future self may seem like a different person altogether.
To those estranged from their future selves, saving is like a choice between spending money on something for yourself today or giving it to a stranger many years from now.
Do people think of the future self as a different person? Hershfield et al. write that research has demonstrated that people make attributions about the future self in the same manner that they do for others, by attributing the future self's behavior to dispositional factors rather than situational ones.
What does that mean in English?
Many people feel like I used to - that your future self will be some better version, perhaps wealthier, happier and better organized. More in control of your own situation and choices.
Over the past few years, I have come to realize that I am much the same person that I was twenty years ago, although I have endured several hardships and losses of some of those that I loved.
On the other hand, I did not have children twenty-two years ago during my first year of marriage, and now have a son who recently turned twenty and will be starting his third year of college in a week and a fifteen-year-old daughter who has already started her sophomore year of high school earlier this month.
Although I have lost seven close relatives in the past twenty years, one could argue that they have been replaced by seven new people including my two children, my nephew and four nieces.
Hershfield and his colleagues performed experiments on young volunteers where they used age-progression software such as what is now easily available in many apps like Oldify, Make Me Old or AgingBooth.
These algorithms are kind of scary and can provide an image of what a person will look like in as many as thirty years time.
They examine the association between seeing an embodiment of one's self in the future and the propensity to save for retirement or accept later monetary rewards over immediate ones.
Ultimately, Hershfield and his colleagues find that the volunteers in the experiment who see their future selves more than double the amount of money they say they would allocate to retirement savings.
Not surprising because, like Mark Wexler was kind enough to share his own computer-aided age progression for the world to see on Flickr, there is a wrinkly white-haired guy thirty years in his future, should he remain alive, who will undoubtedly need a decent amount of money to continue paying his bills, going to movies and restaurants, traveling with his wife or by himself or a future lady friend if he becomes widowed or divorced, and if he is lucky, spoiling his future grandchildren.
Like Mark Wexler, I, too, recognize that I would like to be around thirty years from now. I no longer harbor the illusion of becoming wealthy, but I sure would like to have a six-figure income in my golden years, like I do now in my prime working years in my late forties.
...Is You
Hershfield and his colleagues and other behavioral economists have found that the age-progression exercise helps people recognize that the future self is indeed the same person as the present self.
The future Dr. Benartzi will be Dr. Benartzi, the future Hal Hershfield will still be Hal Hershfield, the future Yours Truly Money Mensch will be an older and hopefully happier, wiser and wealthier Money Mensch, and the future You will still be You.
You and I had better send a few dollars to a savings account this month, because I suspect that the future You and I will both need it very much.
As a matter of fact, I just paid my future self $300, as I do most paydays. The older me will thank the forty-seven year old me.
A few months ago, during the NFL draft in late April, I heard an interview on the radio with Richard Thaler, an economist from the University of Chicago who described the role that behavioral economics plays in the draft.
He authored a piece called "The Loser's Curse: Overconfidence vs. Market Efficiency in the National Football League Draft" in 2005 with Cade Massey of Duke University.
It is a fascinating piece, and if you do not care to read or skim through it like I did, the abstract of it is that they address a question of increasing interest to researchers in a variety of fields as to whether the incentives and experience present in many “real world” settings mitigate judgment and decision-making biases.
To investigate this question, Thaler and Massey analyze the decision making of National Football League teams during their annual player draft. This is a domain in which incentives are exceedingly high and the opportunities for learning rich. It is also a domain in which multiple psychological factors suggest teams may overvalue the “right to choose” in the draft – non-regressive predictions, overconfidence, the winner’s curse and false consensus all suggest a bias in this direction.
Using archival data on draft-day trades, player performance and compensation, they compared the market value of draft picks with the historical value of drafted players. They find that top draft picks are overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research.
Painstakingly, Thaler and Massey analyzed the performance of many players over many years in respect to their original draft position.
After much analysis, their modest claim in this paper is that the owners and managers of National Football League teams are also human, and that market forces have not been strong enough to overcome these human failings.
"The task of picking players, as we have described here, is an extremely difficult one, much more difficult than the tasks psychologists typically pose to their subjects. Teams must first make predictions about the future performance of (frequently) immature young men. Then they must make judgments about their own abilities: how much confidence should the team have in its forecasting skills? As we detailed in section 2, human nature conspires to make it extremely difficult to avoid overconfidence in this task."
Why mention this?
First, because I have bore witness to many horrible drafts as a Chicago sports fan, even more by the Bulls than the Bears, and many horrible picks by the Cubs before Theo came to town to save us.
I believe that the Bears suffer from the Loser's Curse when it comes to their draft picks year after year, not having drafted well since Kyle Long in 2013 and Matt Forte and Earl Bennett way back in 2008. If you look at their draft picks over the past ten years, only a few became viable NFL players for more than a few years.
When it comes to the Bulls, well, I do not recall them making a good pick since Jimmy Buckets in 2011 or D-Rose fell into their lap with the first pick in 2008. Taj Gibson was a pretty good pick in 2009, so the brain trust of GarPax traded him and draft bust Dougie McDermott to the Oklahoma City Thunder for the worst three players on their team late last season. If that is not a manifestation of the Loser's Curse, I am not sure what is.
Note: I am updating this post in August 2018 and think that GarPax may have hit on something with Laurie Markanen. We shall see...
My prediction is that Cameron Payne will not become a viable player in the next two seasons, and then GarPax will be forced to quietly move him along.
My second reason for mentioning my reading of this study is that it led me into a larger overall delving into the topic of behavioral finance. Not a typical blog topic, I know, but a fascinating one nonetheless. And one that pertains strongly to money.
 |
 |
I read Behavioral Finance in Action, a paper by Benartzi written in 2012 for Allianz Global Investors Center for Behavioral Finance. You will no longer find it posted on the Allianz website, but can access it at the above link on the Majestic Asset Management site.
Benartzi writes that many young people view their older selves heading into retirement as strangers.
The disconnection between our present and future selves is well recognized, and it correlates with a reluctance to save money for our future selves.
I, myself, suffered from this misconception for many years. During my twenties, I do not recall consciously knowing or caring that retirement existed. In my thirties, I thought that somehow I would become wealthy by identifying some chance or opportunity that would present itself. Up until that time, I largely gained whatever modicum of success that I had obtained by acting upon opportunities that were presented to me.
In the nearly eighteen years since I turned the big 3-0, I have either not received such opportunities to become wealthy or I have failed to recognize them.
My brother did propose starting a trading firm, just the two of us, when he was laid off from a law firm in the throes of the Recession, but I took what I thought was the more prudent and safer course, and kept the economic development position that I remain in today.
I do not think that we would have made it big in the trading world, but I will never really know.
Perhaps we would both be millionaires today had I decided to take the plunge. More likely, I could have suffered massive financial losses, destitution, divorce and other disastrous results.
In any case, I never did make it rich. I continue plugging away and working hard at a difficult position and strive to continue remaining a gainfully employed member of the American middle class. I pay my bills and support my family, yet we never make it very much ahead of the curve despite my efforts.
I recognize that I hope to remain alive for many more years and, if I am successful at remaining among the living along with my wife, the future us will require plenty of U.S. currency in decades to come to carry us through and allow us to maintain a decent lifestyle.
The Future You...
Hal E. Hershfield, Daniel Goldstein and five colleagues wrote an article titled "Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self" for the Journal of Marketing Research in November 2011.
It was another thought-provoking article, in which the authors wrote that one might feel more connection to one's future self in one year than one's future self in 40 years and at the extreme, with a total lack of psychological connectedness, one's future self may seem like a different person altogether.
To those estranged from their future selves, saving is like a choice between spending money on something for yourself today or giving it to a stranger many years from now.
Do people think of the future self as a different person? Hershfield et al. write that research has demonstrated that people make attributions about the future self in the same manner that they do for others, by attributing the future self's behavior to dispositional factors rather than situational ones.
What does that mean in English?
Many people feel like I used to - that your future self will be some better version, perhaps wealthier, happier and better organized. More in control of your own situation and choices.
Over the past few years, I have come to realize that I am much the same person that I was twenty years ago, although I have endured several hardships and losses of some of those that I loved.
On the other hand, I did not have children twenty-two years ago during my first year of marriage, and now have a son who recently turned twenty and will be starting his third year of college in a week and a fifteen-year-old daughter who has already started her sophomore year of high school earlier this month.
Although I have lost seven close relatives in the past twenty years, one could argue that they have been replaced by seven new people including my two children, my nephew and four nieces.
Hershfield and his colleagues performed experiments on young volunteers where they used age-progression software such as what is now easily available in many apps like Oldify, Make Me Old or AgingBooth.
These algorithms are kind of scary and can provide an image of what a person will look like in as many as thirty years time.
 |
| Source: Mark Wexler on Flickr |
Ultimately, Hershfield and his colleagues find that the volunteers in the experiment who see their future selves more than double the amount of money they say they would allocate to retirement savings.
Not surprising because, like Mark Wexler was kind enough to share his own computer-aided age progression for the world to see on Flickr, there is a wrinkly white-haired guy thirty years in his future, should he remain alive, who will undoubtedly need a decent amount of money to continue paying his bills, going to movies and restaurants, traveling with his wife or by himself or a future lady friend if he becomes widowed or divorced, and if he is lucky, spoiling his future grandchildren.
Like Mark Wexler, I, too, recognize that I would like to be around thirty years from now. I no longer harbor the illusion of becoming wealthy, but I sure would like to have a six-figure income in my golden years, like I do now in my prime working years in my late forties.
...Is You
Hershfield and his colleagues and other behavioral economists have found that the age-progression exercise helps people recognize that the future self is indeed the same person as the present self.
| Source: greenray4ever.com |
You and I had better send a few dollars to a savings account this month, because I suspect that the future You and I will both need it very much.
As a matter of fact, I just paid my future self $300, as I do most paydays. The older me will thank the forty-seven year old me.
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