Recently, I was thinking about the movie Moneyball as it related to the financial world and probability. If you haven’t seen the movie, I highly recommend it. It’s about how the Oakland A’s used math and statistics to buy and trade baseball players during the 2003 season, proving that they could finish the season in a strong playoff position by spending less money than other teams.
I also saw a segment on HBO in which a football coach realized that the deciding factor in many football games was ball control and field position. Instead of giving the ball up on the 4th down, as many coaches would, he decided to run a play whenever there was a high probability of success. As a result, this coach’s tiny team in a tiny town finished the season with a much better record than they should have.
In addition, another HBO show did a piece on umpires in baseball. Statisticians looked at every single ball and strike thrown in the major leagues and determined that 30% of all calls made by umpires were wrong. They interviewed a veteran umpire who vehemently defended the role of the umpire in baseball, saying that he didn’t care about the statistics and that the umpires working today were great.
He missed the point, however. Though there is a more accurate way to call balls and strikes that is better for the game, there are some who would rather hold onto tradition and keep the element of human error in baseball.
How do these three stories relate to financial services? Much like officials in sports, we work a lot with statistics. We know that people who manage their own portfolios get 6% less returns than they would if they just stuck it into a single-asset class and ran with it. That may sound a little crazy, but it’s a fact.
Studies from the last decade show a consistent trend: when the market is in decline, consumers will sell, and when the market is improving, consumers will buy. People continue to follow these trends even when they know that they should do the opposite.
The single greatest factor that has the most direct impact on your ability to succeed within a financial services world is to stick to a plan. Follow the plan, and your probability of success will be much higher.
If you have any other questions about the financial services world or factor-based investing, feel free to give me a call or send me an email. I’d be happy to help you!