econlife - What Soccer Can Teach Us About Investing by Elaine Schwartz

After France won the World Cup, the world was sadder. No, certainly not because of the French victory. The reason relates to some emotional math from two economists.

Where are we going? From a soccer win to investing and how we respond to loss.

This is the story…

Winning the World Cup

In a recent study economists monitored the happiness of thousands of fans during years of British soccer matches. Controlling for variables like the time of day and location, they observed happiness fluctuations before, after, and during the games. On the scale they used, fans were 3.9 points “happier than usual” with a win for their team and 7.8 points sadder if their team lost.

And it gets worse. Because the losers’ sadness lasts longer than others’ happiness, those down feelings are four times any upside that winning created.

Below, you can see that people felt the pain of loss more acutely than the joy of winning:

Investing

University of Chicago economist John List suggests that investors ignore stock market fluctuations because they too feel loss more intensely than winning. People who are down $1000 experience the drop more so than if they had been up by the same amount. The result? Most of us sell when stock prices plummet…precisely when we should be patient. Or, we hold on too long because we want to avoid the reality of a loss. Either way, the pain of loss makes us sell at the wrong time.

Our Bottom Line: Loss Aversion

Called loss aversion by behavioral economists like Nobel economics laureate Daniel Kahneman, our desire to avoid a loss affects how we feel and act. For many of us, the dismay over losing a $10 bill exceeds the happiness we feel when we find one.

I suspect though that this picture provides the perfect definition:

And returns us to why there was more sadness in the world after the World Cup.

My sources and more: Thanks to the Washington Post Wonkblog for alerting me to the new soccer happiness study. A perfect summary, the Post article then linked to more detail in this paper on “football” happiness. It also took me to the behavioral side of investing in this NY Times column and to this paper. Finally, this New Yorker Magazine discussion even shows us how politicians can benefit from telling voters what they have lost.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.