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.
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.