So, where does one look for an explanation for the volatility the stock market has been experiencing of late?
To the PGA Tour, of course.
This, at any rate, was where Cass Sunstein, Harvard law professor and the founder and director of the Program on Behavioral Economics and Public Policy at Harvard Law School, looked.
Sunstein, writing at BloombergView, cited this 2009 study, entitled, “Is Tiger Woods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes.” “We analyze over 1.6 million putts using precise laser measurements and find evidence that even the best golfers – including Tiger Woods – show evidence of loss aversion,” the study notes.
The conclusion is that tour players, including Woods in his prime, will hole more par putts of the same distance and difficulty than they will birdie putts.
“Why do golfers do so much better when they are putting for par?” Sunstein asks. “The best explanation, coming from behavioral science, is that most people are ‘loss averse,’ meaning that they dislike losses a lot more than they like equivalent gains,” he writes.
“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.”
Investors react similarly, he argues. “Losses loom much larger than gains, and when the market gets especially volatile it’s tempting to sell. Even if your portfolio ends up the same on March 15 as it was on February 15, the interim losses 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,” Sunstein writes.