What can porn movies teach us about investing?
Severly stupid article today in Wall Street Journal about what March Madness basketball teaches us about stock picking (“Net Gains: How Watching Basketball Can Improve Your Approach to Investing”).
In it you’ll learn that there’s no such thing as a “hot-hand” in basketball; that is, just because you nail one shot doesn’t make it more likely, on average, that you’ll go downtown on the next. On the other hand, it’s not uncommon that a player can hit three or four shots in a row. It would be nice if stupidity came packaged with a dose of coherency, but apparently it doesn’t. And how do these unlikely yet common hot-hands relate to investing? Well, just because you were good at picking stocks last year doesn’t mean you’re going to be good at it this year!
(Back in the dotcom days I used to feed an M&A guy, on his request, tips about companies to invest in. My track record was amazing. Every suggestion I made was a homerun. Sadly, my predictive powers mysteriously evaporated in April 2000. Lesson for basketball players: It’s easier to win a lot of games if you’re on a good team!)
Then it gets dumber.
Investors hates the idea of losing. So, too, do basketball coaches – and it can lead both groups to be a little irrational.
Suppose a team is down by two points and it has time for one last shot. What play does the coach call? Let’s say there’s a 50% chance of scoring a two-point shot and pushing the game into overtime, but only a 33% chance of making a three-point shot and getting the immediate win.
(“Let’s say there’s a 50% chance?” Let’s say there’s a 52% chance of making the two-pointer and only 29% of making the three-pointer?)
Nevertheless, the three-point shot is the rational choice. The reason: If the team makes the two-point shot, it still has to play overtime, where it’s chances of winning are 50%.
They are? For every team? Even if the other team’s three best players have fouled out and it’s given up 11 unanswered points?
And what’s the lesson here for investors? Don’t shy away from stocks just because basketball coaches fear ordering a buzzer-beating 20 footer.
“You shouldn’t be so bothered by day-to-day or month-to-month volatility” University of Chicago economics professor Richard Thaler tells the WSJ scribe.
Great suggestion, except that… teams who trail at half-time usually lose, as the article let’s us know. But the lesson there isn’t to pull out in time but to understand that it’s hard to beat the market. Nope, if you want to learn the importance of pulling out in time, you need to consult the title of this post.
