The 1980 Hockey Team (and the 2015 Badger Basketball Team)
The 1980 US Hockey team accomplished the impossible. They defeated one of the greatest sports powerhouses ever, the Soviet national hockey team. Because of the magnitude of the victory and the culture of the country in 1980, that victory is historically viewed as the greatest sports upset of all time. When people are tested for their emotional reaction to an event, this win scores at the top of the “spurs happiness” scale, which includes both sporting and non-sporting events. But what people rarely talk about when remembering this win is that it was not the gold medal game. Two days later, the US Hockey team had to defeat a very good Finland team to win the gold. And the question is: what if they had lost to Finland? Would people still think of the Soviet win with the same fondness?
I believe the answer to this question is a resounding no. The reason I believe that so strongly is I personally experienced that same chain of events with a team I love. In 2015, the Wisconsin Badger basketball team, like the 1980 Olympic hockey team, pulled off an impossible win, beating the 38-0 Kentucky Wildcats in the first game of the Final Four. But unlike the hockey team, two days later the Badgers lost to the Duke Blue Devils. While not a formal poll, none of the hundreds of Badger basketball fans I have talked to about that Kentucky game look back on it with the reverence and awe it deserves. Very few will watch highlights or replays of that game, which was unquestionably one of the greatest victories in Wisconsin sports and college basketball history. Why? The pain of the Duke loss overrides (or even eliminates) the joy of the Kentucky win.
So why is that? We, as human beings, are hardwired to feel the visceral pain of loss twice as acutely as we feel the joy of win or gain. This is true beyond sports and is seen frequently in investors. It has been statistically proven that investors feel the pain (and experience the fear) of a market downturn twice as strongly as they feel the joy of an equivalent market uptick. Because our brains are wired to avoid pain as much as possible, giving into this “loss aversion” causes us to act irrationally, selling stocks when a rational investor would be buying not selling. But if we know that we are all wired this way, we can understand when our brain is telling us to do the wrong things. And with patience and great coaching by a thoughtful financial adviser that knows our story, we can avoid the destructive nature of loss aversion.
Hope Solo
Hope Solo was the star goalie of one of the most successful sports teams of all time: the US women’s soccer team. And for those who have watched soccer, you know that if the game ends in a tie after two overtime periods, the game is decided on penalty kicks. The way this works is five players line up, one at a time, to attempt a kick on goal from a relatively short distance. Given the distance of the kick, the talent of the kicker, the size of the goal, and the size of the goalie, penalty kicks have a very high success rate. So if the goalie can stop one or two of the kicks, her team generally wins.
So the question for the goalie is: what is the best strategy to stop a penalty kick? In the early 1980s, an Israeli psychologist, who happened to be a soccer fan, decided to study this exact question. What he and his team found was that if the goalie stood in the middle of the goal, she would stop 33% of the kicks. But if she dove left or right, she would only stop 19 and 14% of the goals respectively. In watching tape of soccer matches, almost every time, the goalie dove rather than staying still. Armed with this great, new insight, the psychologist set up a meeting with the national team soccer coach. When presented with this “new information,” the coach just smiled and said “do you think we don’t know that?” And when the psychologist asked the coach “then why does your goalie dive?” the coach responded that when the goalie was told to stay still, the goalie responded, “I just can’t stand and do nothing.”
So what does Hope Solo (and every other soccer goalie who dives at penalty kicks) teach us? Our brains are wired for action. This “action bias” (as labeled by behavioral economists) is so strong that it causes us to act, even when we know patience or inaction (or what the Chinese call wu wei, the art of doing nothing) would lead to a better result.
Applied to us as investors, if you take loss aversion and stack it on top of action bias, particularly when the market is volatile, we, as human beings, have a strong desire to prevent a painful loss and are neurologically wired to take action. This means that we are wired to “chase the market,” selling when we see others selling and buying when we see others buying. This chasing inevitably leads to selling low and buying high, the exact opposite of what a wealth maximizer would do. But if we understand that our desire to take action is innate, and we have great advisers around us to remind us of what we are planning for (and how those goals are damaged if we give into our base fears), then we can protect our future selves.
Michelle Kwan
Michelle Kwan is one of the most decorated figure skaters of all time. Her trophy case is full of national and international gold medals. But missing from that trophy case is an Olympic gold. Her best chance to get the gold medal came in the 1998 Olympics. She came to those Games as a strong favorite and proceeded to skate perfect short and long programs. Yet, even with her flawless performance, she came away with the silver medal because her teammate Tara Lipinski skated even better.
If you would have asked psychologists to predict Michelle Kwan’s mental well-being following the 1998 games, they would have predicted a lifetime of depression. That is the fate of the majority of silver medal winners. The reason is that they have tied their happiness to a comparison, but not a comparison to the more than 7 billion people who are not as good at them at their craft, but the one person who is better. And that comparison causes sustained mental anguish.
But that was not the fate of Michelle Kwan. When asked about her feelings following the games, she expressed nothing but goodwill and admiration for her teammate and her once in a lifetime performance. Kwan expressed contentment at skating as well as she could, and joy at being an Olympian silver medalist. She described the lifelong memories she had created being a part of the 1998 team and spending that two weeks in Japan.
Why is Michelle Kwan different from other silver medalists and what can we learn from her? She made a somewhat unique, but critically important, choice. She decided to build her happiness around her own wishes, hopes, dreams and desires, and not cosign them to someone else. Stated another way, her fulfillment was derived from things within her control, not something she could not (how well Tara Lipinski skated).
What does this teach us about ourselves and our financial plans? I think back on a parable I heard during my time at Northwestern Mutual. Two elderly gentlemen are sitting at a tony café in Boca. One asks the other, “did your portfolio beat the benchmark?” The other gentleman responds, “I have no idea.” The first, with a look of utter surprise asks “then how do you know how well you did?” To which the second smiles and simply says, “I’m here in Boca.”
Michelle Kwan and that wise gentleman remind us that financial planning is a strategy to use our income and assets to maximize our happiness. Our happiness is of our own choosing and has nothing to do with our neighbors, other investors or some contrived benchmark. Assets and income, and their growth and performance, need to be placed in the proper context: as a means to an end (happiness and fulfillment) and not as the end themselves.
Michael Phelps
We saved the best for last. Or at least the most accomplished. In 2008, Michael Phelps set the all-time Olympic record with 8 gold medals in one games. And he won those 8 golds in just 8 events. Stated another way, Michael Phelps had to be perfect. While there were some events where victory was more assured than others, in no event was Phelps as dominant as the 200 butterfly.
Phelps, of course, did take the gold in that event. But not only was it closer than expected, Phelps’ reaction at the end of the race was very non-Phelpsian. Usually a pretty cool customer, at the end of the 200, Phelps burst out of water, threw his goggles off and violently slapped the water. He appeared almost animalistic. NBC picked up immediately at this unique reaction and asked Phelps about it. Phelps admitted that after his first turn, his goggles filled with water, and thereafter, he swam the remaining 75% of the race totally blind. Later, reporters asked Phelps and his coach Bob Bowman about how Michael Phelps could accomplish such an amazing feat. Phelps responded that it was because he had swum that race many times before. When asked to elaborate, Michael Phelps explained that he and Bowman, in preparation, thought about all of the things that could go wrong so that they could prepare for them. One of those things was losing his goggles or having them fill with water. So Michael Phelps, in preparing for the worst, swam many 200 butterflys with water-filled goggles. That night in Beijing, he simply had to do that one more time.
So what does Michael Phelps and Bob Bowman teach us? Financial success depends on preparing for worst case scenarios. Then, in “practicing” for these downturns, determining what actions need to take place to protect your wishes, hopes, dreams and desires. Then, when they happen, rather than panicking and losing, you can “run the race you prepared for” and win.
Conclusion
The athletes in this post are American heroes. They are fun to read about, talk about and learn from. But their stories also serve as the source of great wisdom for all of us. They teach us that:
- The pain of loss is twice as strong as the joy of an equivalent gain.
- Oftentimes not taking action is the path to success.
- True happiness comes from achieving our goals not comparing ourselves to others.
- We do better when we prepare for the worst.
Hopefully, your plans are as successful as theirs.
