We recently came across an article that was written about baseball umpires. It turns out that baseball umpires are biased…and you are, too. We love the intersection of sports, investing and general statistics, and this was no exception. Here are some examples:
- “After analyzing more than 700,000 pitches thrown during the 2008 and 2009 seasons, we found that umpires frequently made errors behind the plate — about 14 percent of non-swinging pitches were called erroneously.” This is a great place to start. We all make mistakes, right?
- “…umpires tended to favor the home team…” Investors also tend to strongly favor their home market.
- “Contrary to the expectation (or hope) that umpires would be more accurate in important situations, we found that they were, in fact, more likely to make mistakes when the game was on the line.” Stress is an interesting thing to pay attention to since investors also tend to make more mistakes when under duress.
- “We also found that the pitch count had an influence over the umpire’s perception of a pitch. When the count was 3-0, and another ball would end the at-bat, the umpires mistakenly called a strike 18.6 percent of the time, compared with a 14.7 percent error rate when the count was 0-0.” In much the same way, investors presume that just because something has happened for a specific period of time, that it’s time for a reversion. Of course, this is similar to the common misconception that, if a coin is flipped to heads 5 times in a row, that we must be due for a tails. In reality, the next toss is completely independent of prior tosses. These timings are extremely difficult to predict; both investors and professional prognosticators get these inflection points wrong more often than they otherwise should.
- “One of the sources of bias we identified was that umpires tended to favor All-Star pitchers. An umpire was about 16 percent more likely to erroneously call a pitch outside the zone a strike for a five-time All-Star than for a pitcher who had never appeared in an All-Star Game.” It turns out that “All-Star” money managers get the same leeway, especially those with solid track records that were likely due more to “factors in drag” than anything else.
- “Technologically, Major League Baseball is in a position, thanks to its high-speed camera system, to enforce a completely accurate, uniform strike zone. The question is whether we, as fans, want our games to be fair and just, or whether we are compelled to watch the game because it mimics the real world, warts and all.” You have this choice in investing, too.
Baseball is mired in tradition, and in many cases the warts are a part of the sport’s storied past and it’s current thrill. We wouldn’t expect those policies to change in the near future, even if it did make the outcomes more fair. But here’s the good news: In your own life and your own portfolio, the decision is entirely yours. You can keep the thrill of the hunt and use a highly discretionary method that is likely to underperform over the long-term, or you can choose a more statistically valid evidence-based approach that is simultaneously less of an emotional roller-coaster and more likely to actually accomplish your financial goals.