Tiger Woods recently became the first professional athlete to eclipse the billion dollar mark in career earnings and endorsements. Now, I have no idea what he does with all his money, but an interesting study of professional golfers shows that Tiger, along with the other Tour players, show a tendency to be risk averse when they putt. Behavioral finance research has shown that individuals are hard-wired to avoid certain risks at crucial times. This risk intolerance is evident even though, in so doing, people impose costly economic penalties on themselves.
Perhaps this study can tell us a little more about why, at key moments, people refuse to take chances that will make them money. The golf research was done by two professors from the University of Pennsylvania. They studied putts attempted by 200 professional golfers between 2004 and 2008, 1.6 million putts in all.* Their research showed that professional golfers make par putts more frequently than they do birdie putts. They estimated that his can cost a top-20 golfer about $1.2 million in prize money per year. The study measured the length of each putt using laser technology and showed that birdie putts were made 3% less frequently than par putts of the same length. They ruled out other factors; player ability, ball position on the green, learning from other players’ putts, and the players’ standing in the tournament. After adjusting for those possibilities and others, they concluded that golfers exhibit a measurable and costly bias known as loss aversion. And yes, even Tiger Woods, widely regarded as the greatest player of all time and arguably the best putter of all time, was just as guilty of loss aversion as his competition.
Stated another way, golfers’ fear of making a bogey carried more weight than the potential benefit of making a birdie. This bias affects how professional golfers play. Many professional golfers admit as much. Justin Leonard, a very successful Tour pro had this to say, “When putting for birdie, you realize that, most of the time, it’s acceptable to make par. When you’re putting for par, there’s probably a greater sense of urgency, so therefore you’re willing to be more aggressive in order not to drop a shot. It makes sense.”
When it comes to investing, I am all for risk management. However, successful investing combines balancing risk and reward. Think about how the aversion to loss may have affected your investment decision making during this past year. Reducing risk has been in vogue since the financial crisis began, sometimes, however, the problem is not too much risk, but too little.
* Advisor Perspectives, Investing Lessons from Golf and Blackjack Players, 9-15-2009
Damien helps individuals invest and manage risk. He is a CERTIFIED FINANCIAL PLANNER™ professional and an Investment Adviser Representative of, and offers securities and investment advisory services through, Financial Network Investment Corporation, Member SIPC. These are the views of Damien Couture, CFP® and should not be construed as investment advice. All information is believed to be from reliable sources, however we make no representation as to it’s completeness or accuracy. Not all recommendations are suitable for all investors. Each investor must consider their own goals, time horizon and risk tolerance. Your comments are welcome. Damien can be reached at 925-280-1800 x101 or dcouture@jbcfg.com.
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DAMIEN COUTURE, CFP