Download Loss Aversion and Incentives Omission Bias Evaluating Talent

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 nowinfamous play in New England Patriot’s history”—
Pete Prisco, CBS
Omission Bias
(3 ball vs. 2 strike counts)
Omission Bias
(3-0 vs. 0-2 counts)
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 . . .
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Estimated Trade Value of Draft Picks
0
.2
.4
.6
.8
Top pick acquired (all possible)
Picks exchanged for top pick (observed)
1
33
65
97
Overall Draft Pick
129
161
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?
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.7
Probability “Better Than The Next Guy”
0
.1
.2
.3
.4
.5
.6
Average=.52
1
2
3
4
5
6
7
By draft round
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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?
a)
b)
c)
d)
e)
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?
a)
b)
c)
d)
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?
1. HTHTHTHTHT
2. HHHHHHHHHH
3. HHHTHHTTHT
• Which Lotto number is more likely to win?
1. 99999
2. 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.
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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.”
Asness
Jegadeesh
and
Titman
1993
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Asness,
Moskowitz
and Pedersen
Moskowitz and
Grinblatt
Chan, Jegadeesh, and
Lakonishok
1994
6 new
working
papers from
AQR
1996
Grinblatt and
Moskowitz
1999
2004
2008
2011
Historical Evidence from Academia
Average Returns for Portfolios Grouped by Momentum
1927 – 2009
Annual Return in Subsequent 12 Months (%)
0.2
18.0%
0.15
13.6%
11.0%
9.7%
0.1
9.1%
6.0%
5.8%
0.05
3.2%
1.1%
0
-0.05
-4.5%
-0.1
P1
20% of stocks with
Worst Momentum
P2
P3
Average Return of Each Quintile
P4
P5
20% of stocks with
Best Momentum
Excess Return of Each Quintile*
* 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.
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Momentum is the Fourth Factor
Annualized Return (%)
 Since the mid-1990s, the standard for any asset pricing study is
to adjust for 4 factors (betas):
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.
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Out of Sample Evidence
• Small and large cap stocks
• Industries
• Bonds
• Currencies
• Index futures
• Commodities
• Corporate bonds
• Emerging markets (all asset classes)
• REITS
Momentum in 58 Different Contracts
Why?
1. Why does momentum exist in
financial market prices, of all assets?
2. Why doesn’t momentum seem to
exist in sports, all sports?