Loss Aversion in Professional Golf

Traders use all sorts of metaphors to describe trading unfortunately most of them are inappropriate and not truly reflective of the nature of trading. If you are looking for a game that to my mind replicates a lot of the difficulties of trading it is golf. From the perspective of an amateur observer golf seems to be a sport where the person who wins is the one who makes the fewest catastrophic errors. Good golfers seem to manage the disasters that inevitably befall all players better than those who dont and superb golfers seem to to make fewer poor decisions on average.If you were to put it into trading parlance good golfers take fewer sub optimal trades and when these trades do go wrong their management of them is much more effective.

In addition to this there seems to be awful lot of self management when things go wrong. Poor golfers seem to be consumed by their errors as are poor traders whereas good golfers allow these events to wash over them. Golf seems to be largely played between the ears, much like trading occurs between the ears.

Interestingly enough the same psychology that applies to traders also seems to apply to golfers as found in this paper – Loss Aversion in Professional Golf  The conclusion from the paper is that merely changing the par rating of a hole without changing the actual layout of the hole alters the psychology of the best golfers in the world.

I have copied the papers conclusion below –

The results presented in this manuscript provide compelling evidence that a loss averse behavior exists among professional golf players. In particular, this behavior manifests when a golf hole is changed from a par rating of par 5 to a par 4 in a US Open tournament, without fundamentally changing the hole’s character. The total effect over four rounds is potentially greater than one stroke, which is often the difference between 1st and 2nd place at the tournament. In this study, we analyzed data from two particular US Open courses: Pebble Beach Golf Links and Oakmont Country Club. Both courses changed a single hole (hole two at Pebble Beach and hole nine at Oakmont) from a par 5 to a par 4 without altering the makeup of the hole itself. Therefore, the USGA unintentionally created a natural experiment in which we could quantify the affect of this change in a loss aversion context. The results support prospect theory (Kahneman and Tversky, 1979).

One could argue that the decrease in scoring could be a consequence of technological advances in the game over time. In our opinion, this is simply not supported by the available data. No other hole on either course shows a consistent decrease in how a hole plays over time when keeping the par rating the same. We would expect a similar decrease over all holes if the results were due to better golfing technology. The average scores on each hole in US Opens for the two courses are presented in Figure 5. It is possible that factors other than length could go  Towards making a hole more or less difficult. For example, there can be holes that turn from tee to green (“dog leg”) rather than relatively straight from tee to green, or even hazards such as sand, water, trees, or tall grass. It does not appear that the holes considered here were altered in any way to change the positions or amounts of hazards. Furthermore, a hole can become more or less difficult from day to day depending on where on the green the hole was actually positioned. Holes cut in the middle of the green are considered to be easier to play than those cut near the edges or potentially near sand traps or water. The USGA tries to spread this out by identifying five different pin positions for each green, so that they can rotate the wear on the greens as the players play the course on four consecutive days (and potentially a playoff on a fifth day). This leads to some easier pin positions and some more difficult ones, and as a consequence should lead to variance evening out about the pin positions. Another possible factor could be that the weather was much worse in the years when the holes were rated as par 5s than par 4s, which would lead to higher scores. If this were the case, however, we should see higher scores on the other seventeen holes as well. We do not, nor should we, expect the weather to be appreciably different over the five or so acres that make up the holes in question, relative to the other seventeen holes on the course. As we see in Figure 5, there is no consistent factor making one year an outlier that might indicate several days of bad weather.

Finally, we should mention how future US Opens, or golf tournaments in general, might be able to utilize the results of this study. Organizers could choose to change short par 5s to par 4s in order to protect par. The expected result would be more pars and bogeys, but the overall golf should be played at a higher level. As a specific example, the 2020 US Open Golf Championship will be played at Winged Foot Golf Club (West Course) in Mamaroneck, New York. The fifth hole at Winged Foot is a 515 yard par 5. In other words, the hole is a relatively short par 5 by professional golfing standards. If the fifth hole’s par rating is changed from a par 5 to a par 4, we would expect a potential 0.22 to 0.31 decrease in average scores at the tournament based on the analysis presented here. This translates to a decrease of approximately one absolute stroke over four rounds, or an increase in three strokes relative to par.