Slideshows | June 14, 2012

Seven personal finance lessons from football

Football is full of economics lessons.

The football pitch can be a laboratory where economists can experiment to their heart's content. And football teaches us important lessons about personal finance. It tells us a lot about how people deal with winning and losing and about the thinking mistakes we can fall victim to when making financial decisions.
In a special "Cup-o-nomics" report, ING consumer economist Charles Kalshoven writes: “Competition, the influence of management decisions, the value of teamwork and behavioural economic pitfalls such as overconfidence and aversion to losing – all these factors can be found both in economics and on the soccer pitch.”
Here are Kalshoven’s seven personal-finance lessons from football.

 

1

Don’t be too afraid to lose

The aversion to losing is deeply rooted – whether the loss is on the field, in the share market or somewhere else. This can lead to sub-optimal decisions.

2

Don’t take too much risk after a loss

On the football pitch we see “all or nothing” tactics when a team is behind. When investing, there may be a tendency to similarly invest more aggressively after a loss – but beware the risk of losing even more of your nest egg.

3

Control your emotions

On the field, sticking to a long-term plan and trusting objective statistics can keep emotions under control and, in the long run, may bring better results. The same can hold true off the field as well.

4

Don’t be fooled by coincidence

Coincidence means you don’t have everything under control: you can be lucky, but you can also be unlucky. A bad footballer manager could see their team promoted because of good luck, just as a bad investor can get lucky with a buy.

5

Sometimes it’s better to wait than to act

In penalty kicks, goalkeepers tend to dive towards one corner – but, statistically speaking, that is not the best strategy. This “action bias” is also seen when investors are too active in uncertain times. Likewise, it can prove costly.

6

Beware of herd behaviour

Going with the herd and sticking to conventional hiring strategies is common in football. Investors also get sucked into this trap. Remember: the market is not always right.

7

Sometimes you see non-existent patterns

If a striker scored in four consecutive matches, there’s no guarantee he will in the fifth. Thinking he will is the “gambler’s fallacy”. A lesson for investors is to not assume future market movements will be dictated by what’s happened in the recent past.

Click here to view the PDF.

InvestingBiasSharesRiskSportGambler's fallacy

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