Last week, I tweeted about the ability of golfers to make putts under different conditions. I claimed that even the best golfers have a loss aversion bias. Therefore, they’re more accurate when putting for par than for birdie. If they miss a par putt, they wind up with a bogey — a painful experience. If they miss a birdie, on the other hand, they often get a par — not so bad. The pain of getting a bogey is greater than the pleasure of getting a birdie. That’s pretty much the definition of the loss aversion bias.
Several of my friends who are golfers suggested that I don’t know what I’m talking about. For instance, my buddy Nick Gomersall wrote, “When you putt for a birdie you are more relaxed, nothing to lose and you stroke it in. Now when you putt for par you have negative thoughts as you think what happens if you miss and you put a bad stroke on it.” Nick is an excellent golfer and an all-round good guy but he’s wrong.
Here’s a link to a 2009 article on the topic, “Avoiding the Agony of a ‘Bogey”: Loss Aversion in Golf — and Business“. The authors, Devin Pope and Maurice Schweitzer, gathered data on 2.5 million putts taken in 239 PGA tournaments between 2004 and 2009. They note that “par” is an excellent divider between gain and loss. Better-than-par is a gain; worse-than-par is a loss. Loss aversion theory says losses are felt more deeply than gains. Thus, a bogey should bring more pain than a birdie brings pleasure. A golfer should try harder to avoid a bogey than to achieve a birdie.
And, that’s exactly what happens. The authors conclude, “…on average, golfers make their birdie putts approximately two percentage points less often than they make comparable par putts. This finding is consistent with loss aversion; players invest more focus when putting for par to avoid encoding a loss ….” Pope and Schweitzer used a number of statistical analyses to control for variables such as distance from the hole, the player’s overall skill, confidence, nervousness, and so on. The only explanation seems to be loss aversion.
Loss aversion is essentially an illogical bias. Why does it occur? According to Schweitzer, “”Loss aversion is the systematic mistake of segregating gains and losses — evaluating decisions in isolation rather than in the aggregate — and over-weighting losses relative to gains…”
Golf, it seems, can teach us a lot about business and finance. To avoid loss aversion, you need to look at the big picture. In golf, that means your position in the tournament rather than your position on the green. In investing, that may mean focusing on your entire portfolio rather than the gains or losses of an individual stock on an individual day. As Monty Python points out, “Always look on the bright side of life.”