310 likes | 545 Views
Loss Aversion and Incentives Omission Bias Evaluating Talent Momentum vs. Luck. Loss Aversion and Incentives. In 4 th down situations where (statistically) it’s better to go for it, NFL coaches punt/kick 96% of the time There are some exceptions . . . But didn’t used to be this way.
E N D
Loss Aversion and Incentives Omission Bias Evaluating Talent Momentum vs. Luck
Loss Aversion and Incentives • In 4th down situations where (statistically) it’s better to go for it, NFL coaches punt/kick 96% of the time • There are some exceptions . . . • But didn’t used to be this way
2009 Patriots vs. Colts • 4th and 2 on own 28 yard line, up 34-28 *embed movie of play here*
Deviating from convention can be risky • “My vocabulary is not big enough to describe the insanity of this decision”—Trent Dilfer, former NFL QB and ESPN analyst • “Ghastly . . . Too smart for his own good this time. The sin of hubris”—Dan Shaughnessy, Boston Globe • “Fourth-and-jack-ass. That’s our name for a now-infamous play in New England Patriot’s history”—Pete Prisco, CBS
Omission Bias • Super Bowl XLII: Giants vs. Patriots
Omission Bias • 2009 U.S. Open Tennis Championship
Omission Bias • 1993 NCAA Basketball Championship Michigan vs. NC • *embed movie here*
Evaluating Talent 1998 NFL Draft: Two “franchise” QBs
Evaluating Talent Less than 10 years later . . .
Evaluating Talent Early picks are very highly valued: #1 = #10+#11 = #29+#30+#31+#32 You have to pay about the same Does this match future performance?
Probability “Better Than The Next Guy” Average=.52
Evaluating Talent is Risky • 9 of last 12 #1 picks have been QB’s
Who Else Could You Have Had? = + a 3rd round pick = +
Evaluating Talent in the NFL • What were the #1’s worth? 1x 6,000x 2x 1.5x 3x
Evaluating Talent How do you hire and fire people? How confident are you in your ability to judge performance?
The Myth of Momentum • Quiz #1: Which of the following is the best predictor? • Performance over last 5 attempts • Performance over last 5 games • Performance over last month • Performance over season • Performance over multiple seasons
The Myth of Momentum • Quiz #2: Heading into playoffs, which of the following is the best predictor of success? • Performance in most recent game • Performance in last week • Performance in last month • Performance over entire regular season
Fooled by Randomness • Flip a coin 10 times . . . Which sequence is more likely to be random? • HTHTHTHTHT • HHHHHHHHHH • HHHTHHTTHT • Which Lotto number is more likely to win? • 99999 • 13679
Damned Statistics • What does “4 out of his last 5” really mean? • Is a player 0 for 12 “due” to hit his 13th or doomed to miss it? • Situational or conditional statistics
Momentum in Financial Markets Momentum is the phenomenon that stocks which have performed well in the past relative to other stocks (winners) continue to perform well in the future, and stocks that have performed relatively poorly (losers) continue to perform poorly. 24
Academic Discovery Fama and French:“…[T]he main embarrassment of the three-factor model, [is] its failure to capture the continuation of short-term returns documented by Jegadeesh and Titman and Asness…[T]he continuation anomaly exposes one of its shortcomings.” 6 new working papers from AQR Asness, Moskowitz and Pedersen Asness Moskowitz and Grinblatt Jegadeesh and Titman Chan, Jegadeesh, and Lakonishok Grinblatt and Moskowitz 1996 2004 2008 2011 1994 1999 1993
Historical Evidence from Academia Average Returns for Portfolios Grouped by Momentum 1927 – 2009 * Source: CRSP Database. Data is based on monthly returns from overlapping portfolios. Momentum is calculated by ranking stocks based on their past 12-month return excluding the most recent month. Returns are in excess of the beta-adjusted CRSP Value Weighted Index. Past performance is not an indication of future performance.
Momentum is the Fourth Factor • Since the mid-1990s, the standard for any asset pricing study is to adjust for 4 factors (betas): Annualized Return (%) Size Value Momentum SmB Factor is a long-short portfolio composed of small stocks minus big stocks by market capitalization. HmL Factor is a long-short portfolio composed of stocks with high book to price valuations minus stocks with low book to price valuations. UmD is a long-short portfolio composed of stocks with positive momentum minus stocks with negative momentum by looking at the last twelve months price return excluding the last month. Past performance is not an indication of future performance. 27
Small and large cap stocks Industries Bonds Currencies Index futures Commodities Corporate bonds Emerging markets (all asset classes) REITS Out of Sample Evidence
Why does momentum exist in financial market prices, of all assets? Why doesn’t momentum seem to exist in sports, all sports? Why?