24 February 2016

Striking parallels between golf and the stock market

Carbon ambassador and client, Richie Ramsay, is far from idle while he takes a break from the European Tour, as he and his wife Angela prepare for the birth of their first child.

The three times Tour winner is still finding time to work on his game while back home in Scotland.

That means taking to the driving range and making time to get out on the fairways to fine-tune his short game.

But Richie is working equally hard on the mental side of his game, appreciating how important that can be during the nitty-gritty of tournament golf, where the finest of margins separate winners from the rest of the high quality international fields.

During the season opening “Desert Swing,” the 32-year-old Scot was up against players like multiple Major winners Jordan Speith and Rory McIlory, along with world top four player, Rickie Fowler.

University of Stirling graduate Richie said: “Sports psychology has always fascinated me and it is a part of golf which is taken very seriously by today’s players. I am always working on the mental side of my game.”

Intriguingly, Cass R Sunstein, the former administrator of the White House Office of Information and Regulatory Affairs and Harvard Law School professor, believes professional golf has parallels with the Stock Market.

In his recent Bloomberg View column, he has been using golf and human psychology as an analogy for the volatility we have been witnessing in the Stock Market.

He notes that top golfers make par on most holes and in any round they are also faced with putts for birdie or bogey.

Professor Sunstein noted: “A stroke is a stroke, so you might think that whether a pro makes a putt can’t possibly depend on whether the result would be making a birdie or avoiding a bogey. But you’d be wrong.

“A study of over 1.6 million putts shows that professional golfers are significantly more likely to succeed in sinking a par putt than a birdie putt of equal distance and difficulty.”

In effect, if players putted as well for birdie as they putt for par, their bank balances would be boosted considerably.

The professor explained: “The best explanation, coming from behavioural science, is that most people are ‘loss averse,’ meaning that they dislike losses a lot more than they like equivalent gains.

“A loss from the status quo is very painful, and so people will do a lot to avoid it. A gain is good, but it isn’t nearly as good as a loss is bad.

“Like the rest of us, professional golfers are affected by what John Maynard Keynes called ‘animal spirits’: the feelings of the primitive creatures who lie within us. Hating the prospect of losses, golfers focus intensely on avoiding those bogeys, and often succeed.”

Turning his attention to the Stock Market, he said: “Of course it’s true that the recent volatility, and the sharp declines, have a lot to do with real-world events, including slower growth in China and rapidly falling oil prices.

“But the fundamentals remain pretty solid, and the ultimate effects of such factors are at least partly a product of psychology.

“Investors know that stocks go up and down, but losses loom much larger than gains, and when the market gets especially volatile it’s tempting to sell.”

The US columnist said that even if an investor’s portfolio ends up the same over the course of a month of upheavals, interim losses can tempt many people to get out.

“And if it’s a terrible month, a lot of people will want to avoid more bogeys – and scale back their holdings.

“A closely related phenomenon is called ‘probability neglect.’ When an outcome stirs strong emotions, people tend to neglect the likelihood that it will occur. If the prospect of a bad result gets the heart racing – a plane crash, a terrible disease, a loss of 30% of your portfolio – most people will take strong steps to avoid it.”

But he stressed: “They will pay too little attention to a comforting thought, which is that worst-case scenarios usually don’t come to fruition.

“Loss aversion and probability neglect operate at the individual level, but much of our behaviour is a product of social interactions, which multiply their effects.

“Even when the fundamentals are strong, making significant market declines unlikely, investors are affected by the actions of other investors. Like a bank run, a decline in stock prices creates its own momentum.

“In the most extreme cases, what happens, and what we are now witnessing, is an ‘informational cascade’ on which investors attend to the signals given by the behaviour of other investors, even if their own information suggests that the other investors are wrong.

“Informational cascades help fuel sell-offs. If many investors are perceived to be selling, there is a snowball effect, as the ‘should sell’ signal gets louder, not because people have reliable information that selling really makes sense but simply because of the behaviour of others.

“The good news is that in ordinary circumstances, investor cascades are halted.

“The smart money is aware of everything I have said here, and if the fundamentals really are strong, savvy investors start buying. They aren’t loss averse, they don’t neglect probability, and they spot opportunities when they see them.

“If there are enough of them, they can stop and eventually reverse dramatic movements driven by animal spirits.”

Professor Sunstein signed off: “History tells us that in the long-run, equity markets will do just fine.

“In the short-run, however, the prospect of bogeys can create a lot of havoc, especially if a lot of people decide that they want to get out of the game.”

Meanwhile back in Scotland, while Richie prepares for fatherhood and a subsequent return to European Tour action, the experienced Carbon team drive forward with their award-winning approach to investment.

Carbon managing director Gordon Wilson said: “Investor behaviour is really intriguing – when share prices fall, investors want to sell when they should be buying in the sales!

“There is far more to gain for investors prepared to buy when everyone else is selling but it takes a bit of nerve – just like sinking that elusive birdie putt.”

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