Mickey Kim: Sudden-death aversion leads to “suboptimal” choices

INVESTING: Mickey KimOn Jan. 16, 2016, the Green Bay Packers traveled to Arizona for a playoff game against the Arizona Cardinals (who had annihilated the Packers 38-8 three weeks prior).

A seven-point underdog, the Packers trailed 20-13 with no timeouts and less than a minute to play when they faced an impossible fourth-and-20 from their own 4-yard line. Quarterback Aaron Rodgers heaved the ball, which wide receiver Jeff Janis improbably caught more than 50 yards downfield.

With the ball at the Arizona 41, there was time for one final desperation play. Rodgers fired a “Hail Mary” into the end zone, which was again miraculously caught by Janis. The Packers trailed 20-19 with 0:00 on the clock.

Coach Mike McCarthy had the choice of attempting a game-tying 33-yard extra point kick that would send the game into overtime or going for a two-point conversion that would win (or lose) the game immediately.

This was no different from any investing decision. Both are probabilistic endeavors. You assign probabilities to various possible outcomes. The process-oriented coach or investor takes the action with the highest chance of success.

McCarthy had seconds to decide which was greater: the chances of 1) Rodgers gaining the 2 yards needed for the immediate win or 2) making the kick to tie AND winning in overtime.

During the regular season, the Packers had the second-highest two-point conversion success rate in the league (67%). The Cardinals defense had just given up 96 yards in less than a minute and was reeling. The Packers were underdogs, on the road and decimated by injuries—so their chances of overtime success were significantly below average.

Alas, McCarthy elected to kick the extra point. The Cardinals won the coin toss and drove 80 yards in three plays for the winning touchdown. Rodgers never touched the ball again.

Richard Thaler won the Nobel Prize the following year for his pioneering work in the field of behavioral economics. According to classic economic theory, individuals are like Mr. Spock—perfectly rational and capable of unemotionally analyzing and acting on all relevant data. In reality, Thaler asserts, humans (NFL coaches) are more like Homer Simpson—highly emotional, lacking in self-control and influenced by all sorts of biases that often lead to poor decisions.

Thaler and Jane Risen, both from the University of Chicago Booth School of Business, and Cornell’s Thomas Gilovich and Jesse Walker published “Sudden-Death Aversion: Avoiding Superior Options Because They Feel Riskier” and wrote a related op-ed for The New York Times called, “Force Overtime? Or Go for the Win?”

According to the authors, “the Packers had fallen prey to a common fallacy: When facing decisions like this, people are often myopic, focusing too much on the possibility of an immediate loss. They avoid the risk of instant defeat, even when taking that risk offers the best path for victory.”

The authors examined every instance over a 10-year period (2004-2013 seasons) in which an NFL team scored a touchdown after trailing by seven points with under three minutes to play (47 observations). The coaches overwhelmingly followed McCarthy’s example and avoided the risk of immediate defeat by opting to kick the extra point 42 times (89%). The results were similar for under two minutes, under one minute and under 30 seconds.

“The bias can be costly,” continued the authors. “Teams that chose to avoid the two-point conversion won the game only 40% of the time, which is well below the average rate of successful two-point conversions (about 50%). Surely some of those teams should have known they were underdogs if the game went into overtime, and mistakenly avoided a risk they should have taken.”

Why don’t more NFL coaches “go for two” and improve their chances of winning the game, which is the ultimate goal? If the two-point-conversion attempt fails (“sudden death”), the coach is criticized as a “wild-eyed gambler” (ask the Baltimore Ravens’ John Harbaugh), while few coaches are faulted for losing in overtime. Indeed, as famed English economist John Maynard Keynes said, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

The authors concluded, “‘Live to fight another day’ is often a good rule of thumb, but it is not always the best strategy to pursue. Good judgment, in sports and elsewhere, sometimes requires the presence of mind to take the risk of an immediate setback to achieve lasting success.”

As professor Thaler told me, “In both sports and investing, the best policy is to adopt a good long-term strategy and just accept that sometimes the markets go down and attempts to convert on fourth-and-inches fail.”•


Kim is Kirr Marbach & Co.’s chief operating officer and chief compliance officer. He can be reached at 812-376-9444 or mickey@kirrmar.com.

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