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Darwin's Grove

Prospect Theory and those irrational golfers!

6/24/2009

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In 2002 Daniel Kahneman and Amos Tversky shared the Nobel Prize in Economics for their work on Prospect Theory, which opened the door to looking at risk from a behavioral perspective.  They showed the diversion from "rationality" is that people simply were more averse to loss than inclined toward gains.  While we look for instances of Prospect Theory in action in our modeling of behavioral finance and marketing, the evidence is all around us- even in pro golf.

Some research reported recently in NYTimes article (link) evidently shows that loss aversion affects the putting behavior of even top golf pro's.  To what extent, well its estimated for the top 20 golfers, to the tune of $1.2 million in prize money per year!  And where does the behavior come from?  To avoid a bogey, golfers put more aggressively to make par, than if they are putting for a birdie, even though from a rational perspective they need to be make the same putting decisions in either case.

While we can't fight human nature, and the desire to avoid "bogeys" is strong, these behavioral biases are all around us and are hard to see.  By identifying those that may stand in the way of larger longer term goals, we might just figure out what really matters and get there a little more easily.

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