Every week we buy stock in hockey players, and hope to reap the dividends. Lessons in behavioural finance can help us make better decisions
Behavioural finance studies the relationship between psychology and investment – more accurately, how our own psychological predispositions shape our investment decisions. There is a trove of literature showing how bad most people are at making investments. This makes complete sense when you think about how we evolved, the biases or mental shortcuts we developed, and just how ill-adapted they can be in a society as complicated as the one we currently live in. We are short-term thinkers – we evolved to observe those around us, mimic our groups and follow the herd.
Most of human history has evolved in nature’s arena – placing greater onus on survival than anything else. It’s no wonder complicated financial markets, derivative strategies, options, and accurately pricing equities eludes us.
These biases (or predispositions) have cross-functional effects on many aspects of our lives, including our fantasy sports teams. While a conscious awareness of their impact on our decision-making processes never guarantees success, it can certainly help us make more informed decisions by streamlining our synthesis of information.
Here are a few of the biases that can affect people’s financial portfolio – and your fantasy hockey team.
One of the most classic and well-understood principles in behavioural finance is the concept of “prospect theory” (or, “loss aversion”). It illustrates that humans feel the pain of a loss much more greatly than the joy of a proportional gain – we place greater emphasis on “not losing” than we do on “winning”. This could explain why small leads in hockey can be so dangerous as teams go into a risk-averse, defensive shell – though that’s an article for another day. Prospect theory can manifest itself in financial markets when our stocks begin plummeting in value – we panic, and become blindly focused on getting “back to even” by engaging in even riskier investments with the hope that we’ll score big to make up our losses.
In fantasy leagues, we’ve all been the victim of this behaviour, and we see it every year. Opponents whose rosters could conceivably win your league on paper – but, after rattling off 3 straight losing weeks, they’re aversion to loss kicks in and it leads them to start making grandiose trade offers, or dumping serviceable players for guys riding hot streaks.
Don’t dismantle your team for a short-term pay off. Or, consequently, take advantage of your opponents who are irrationally feeling the brunt of prospect theory. Pry their underachieving stars for players who are outperforming their career averages and will likely regress, or for guys riding hot streaks thanks to a beneficial (yet short-term) stint on a top line.
Confirmation bias involves favoring information that supports your existing beliefs, while ignoring information that could dispute them.
This manifests itself in fantasy sports as members of your pool begin to favour players from their favourite NHL teams – they are generally willing to overpay to acquire those players, and have overly-positive projections of how they will perform.
This is especially true at the beginning of the year, when people are more optimistic about the upcoming season. It also becomes quite apparent when their favourite team acquires a new player during the off-season – how many times have you heard someone say, “I don’t think he’ll fit in my team’s system very well”? Almost never.
People want to be optimistic about the things they care about, and this can make it easy to take advantage. Shop a star player from Toronto to a big Maple Leafs fan for a massive over-payment – and try remaining as objective as possible when you’re in the other seat.
When we utilize mental shortcuts and rely on the most immediate or easily recalled information to evaluate specific things/people, we are using the “availability heuristic”. For example, you’re much more likely to die by fireworks than a shark attack – but the media’s disproportionate coverage and alarmist narratives surrounding shark attacks allow viewers to think they’re much more common than they are.
Throughout the hockey season, it is inevitable that sports media outlets will eventually center their attention around a big-name player assumed to be on the trading block. This year we saw it with Taylor Hall, and we’ve seen it in the past with Martin St. Louis, Marian Gaborik, Roberto Luongo, etc.
These are players in their prime on expiring deals, former stars beginning to taper off with age, or veterans seeking Cup runs with better teams. In any case, people begin to daydream about the possibilities: this year, it was Taylor Hall joining a powerhouse line with Nathan MacKinnon and Mikko Rantanen in Colorado. Hall’s name began to fly in trade offers in fantasy hockey leagues from GM’s who wanted to grab him before he was dealt and began tearing it up on a new team.
The winners in these deals were the GM’s who promptly unloaded him for an inflated value. This value was created by the availability heuristic, disseminated from hockey shows and podcasts that allowed individuals to dream up the possibilities of what a former Hart trophy winner could do, if and when he got himself out of New Jersey. Historically, many stars have struggled to acclimate to new teams halfway through the year, often under-performing their career averages in fantasy-relevant stat categories.
Stock market prices have almost always been disproportionate to the actual underlying performance of the companies that make up the market. That is because people tend to ignore the most fundamental rule of investing – buy low, sell high. People are much more likely to buy stock in a company that is already performing extremely well, pushing its prices to artificially higher and (eventually) unsustainable levels. As the availability heuristic feeds them an all-positive narrative about its future prospects, people will continue buying – feeding the bubble.
The thing about high stock prices, however, is that it naturally means there is less value to gain once you buy in. Many of the people who came out ahead after the 2008 financial crisis were the people who did the exact opposite of others – buy stock when prices were at historical lows.
You have a finite amount of assets to extract maximum value throughout your fantasy hockey season. Don’t buy in to hype when its artificially inflating the value of a player, and thus your opponent’s asking price. That’s the same as buying stock in the market when it’s at an all-time high – is there any value there for you?
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