The temperature is warming up. Cars are coated in yellow pollen. Yes, spring is here – and so is the Masters Tournament in Augusta, Georgia that just finished up last week. I love the game of golf (most of the time). I also love to watch golf. The sport can reveal much about a person - but can it teach us anything about our finances and investing? I believe so, because it offers some poignant clues about human psychology.

Let me give you an example. Professional golfers make par on a majority of holes, and occasionally experience the joy of a birdie or the pain of a bogey. To accomplish either, it usually comes down to one stroke – the putt. We may think that the probability of a pro making a putt can’t possibly depend on whether the result would be making a birdie or avoiding a bogey. But you would be incorrect.

The University of Chicago Business School studied over 1.6 million putts and found that professional golfers are much more likely to succeed in sinking a par putt than a birdie putt of equal distance and difficulty. And get this - If the average professional golfer putted as well for birdie as he putts for par, he would make an additional $1.2 million a year¹.

Why do golfers do so much better when they are putting for par? Behavioral science provides the best explanation: Humans are “loss averse.” Loss aversion refers to people's tendency to prefer avoiding losses to acquiring equivalent gains. Hating the prospect of losses, golfers focus intensely on avoiding those bogeys, and often succeed.

Which brings us to the stock market. Investors know that stocks go up and down, but the prospect of a decrease in their portfolio’s value weighs much heavier than potential gains, and when the market gets especially volatile (even if it continues to rise) it’s tempting to sell. Even if a portfolio end up at the same value on March 31st as it was on January 1st, the interim volatility and decrease in market value tempt many people to get out.²

History tells us that in the long-run, equity markets will do just fine; however, in the inefficient short-run the prospect of “bogeys” can create panic, especially if a lot of people decide that they want to get out of the game at the same time. So as you enjoy your weekend watching the tournament, remember that investing, much like golf, is won between your ears.²

Source Content:

¹ "Is Tiger Woods Loss Averse?  Persistent Bias in the Face of Experience, Competition, and High Stakes" by Devin G. Pope and Maurice E. Schweitzer et al - June 2009 - University of Chicago  - Booth School of Business https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1419027

² "How Pro Golf Explains The Stock Market" by Cass Sunstein - February 12, 2016 https://www.bloomberg.com/view/articles/2016-02-12/how-pro-golf-explains...