Gazing right back at you is someone who relentlessly falls prey to the law of small numbers; to hindsight bias; to over-reaction; to narrow framing; to mental accounting; to status-quo bias; to the inability to evaluate your own future regret; and, most of all, to overconfidence. – Jason Zweig

I’ve been digesting all the literature on behavioral economics I can find as I stated in an article earlier this week. This focus area has gotten quite a bit of attention in the past few years with Richard Thaler and Daniel Kahneman each winning the Nobel Prize in economics for their work in this field. Thaler (Misbehaving) and Kahneman (Thinking Fast and Slow) have each written must-read books on the subject. I recommend both books, they are loaded with information. To give a brief induction into the various behavioral economic concepts and their application to fantasy baseball, I will utilize a speech given by the Wall Street Journal’s Jason Zweig on the subject.

This speech is the most compact but useful bit of information I’ve read on behavioral economics. It’s a great starting point for owners to begin to mull over these concepts and how to apply them to the game they love. While Zweig’s full speech can be found on his website, here are 10 main points and how I see them applying to fantasy baseball. Besides the links to fantasy baseball I’ve noticed, there are more I missed for please do your own study.

Quote 1: “First of all, there is a substantial body of evidence that overconfidence grows worse as people become more expert in a given field. This is called the “inverted expertise” effect. In short, the more you know, the more you think you know than you really do.”

This idea can easily be summed up in this one graph:

Once a fantasy owner understands they don’t know much and most of the people writing about fantasy might know less (I’m definitely included), the owner has a step up on their competition.

I like to find experts on parts of the game (e.g. prospects, game theory, research, news) than those covering every subject. The less confident an expert is overall, the more I trust them. Also, I really trust them if they have a strong opinion because they are more likely right.

Quote 2 “I believe that’s mainly because the more intensively you research a stock, the more of yourself you’ve invested in it. Your own superior knowledge of the stock becomes a sunk cost. Once you invest in a stock, you’ve invested something of yourself, too. It has become “your” stock, and you want it to go up to validate the superiority of your own judgment.

….

What’s more, we know that people generally regret errors of commission more than errors of omission. … Our tendency to engage in counterfactual thinking — to ask “what might have been” if we had taken a different course of action (or inaction) — can have a paralytic effect on decision making.”

…

This is often called the “disposition effect” or “status-quo bias.”

All owners have our favorite players. We’ve researched them. We’ve watched to see if they are healthy in spring training. We draft them up and then they turn into a pumpkin.

We’ve spent so much time and possible resources on these disappointments, we just can’t move on. The pitcher could have lost 2 mph on his fastball or the hitter lost all his power.

Owners at times need to step away from the player and re-evaluate him. Basically, ignore the player’s previous bio and create a new one to see if the player’s value has really changed.

Quote 3: “When it reverses, it reverses violently — because it’s so finely interwoven with the fabric of your own self-esteem. After all, to sell a stock is to concede that you were fundamentally wrong. You made a mistake, and you’re kicking yourself for being such an idiot, and you want out of the damn thing just as fast as possible so you can go back to believing that you really do know what you’re doing. The sooner you can hide any evidence to the contrary, the better. Believe me, whoever gets to take the other side of that trade will be delighted that he found you.”

And this is the other side of the equation. An owner may be fed up with a player but others haven’t experienced the suboptimal production. They may still value him and are willing to trade for the struggling talent. Most likely the player’s value is somewhere in between their production and projected production. The key is to find the owner who still believes in the preseason projection.

Quote 4: I’m always amazed how inarticulate most fund managers become when I ask them about their sell discipline. I’d think you should be extremely worried if you can’t explain your sell discipline in, say, 50 words or less. If I were you, I would give this some serious, serious thought.

This quote goes with the two before it, owners need to have a firm buy and sell procedure for players.

Quote 5: “Also, you must continually ask yourselves the most basic possible questions before you buy a stock: How confident can I realistically be that my analysis will turn out to be right? How have similar analyses worked out for me in the past? What’s the probability that I could be wrong? And how prepared am I for the consequences of surprise if I turn out to be wrong? You’ll be hearing a lot about overconfidence at this conference; take it to heart. You just don’t know as much as you think you do; none of us do.”

All owners are going to be wrong at some point. We just need to be right more than wrong.

Quote 6: “When time is compressed, short-term partial gratification becomes more satisfying than long-term fuller gratification. This makes the pursuit of any long-horizon investment strategy — like, say, a deep-value approach — psychologically painful, both for you and your clients. They want to eat now, not later — and so do you. A strategy that will not pay off for years has become an almost unbearably expensive luxury in this increasingly short-term world.”

The season’s a grind and owners need to make decisions which will help overall the long haul. Be careful not to chase the hot hitter will a .455 BABIP or the pitcher with a 1.35 ERA and a 90% LOB%.

Quote 7: “Prospect theory holds that most individuals perceive the pain of loss at least twice as keenly as they feel the pleasure of gains.”

Try not to mull over your losses or what might have been if your first round talent gets hurt. It happens. Instead, concentrate on working with your available team and keep plugging away.

Quote 8 “If you pick stocks according to the principles of behavioral finance, you’re going to end up with a portfolio that looks nothing like any index. It might be full of dead and dying value stocks, or it might be full of scorching momentum stocks, or it might be full of stocks that keep shocking the daylights out of the analysts. Whichever approach you choose, in the long run it should make your clients very wealthy. But in the short run, these behavioral strategies may well make you poor — by sending your tracking error shooting straight through the roof, and your clients shooting straight out the door.”

The above situation reminds me of the boring teams I’ve been drafting the past few seasons. Nothing shiny, just good values. A few shiny stars can lead to disappointing results.

Additionally, I plan on targetting players who have quickly fallen out of favor. I love betting on regression.

Quote 9: You need to realize that the twin heuristics of representativeness and availability are what drive cash flows in and out of investments. Representativeness (sometimes called “the law of small numbers”) is the human tendency to consider short series of data to be typical of long-term trends. Availability, meanwhile, is the natural inclination to let recent and vivid events overwhelm our judgment about normal expected outcomes. Thus a manager who generates a 100% return in a 9% market is also regarded as a genius, instead of the more likely assumption that he is either incredibly lucky or dangerously insane. Representativeness and availability are the main reasons why the public buys high and sells low—and why pension consultants hire high and fire low.

If owners can keep their heads and look past short-term results, they can reap huge advantages.

Quote 10: “That’s why it’s so crucial to realize that behavioral finance is not the study of how “other” people behave. It is the study of how we all behave. It is not just a window onto the world; it is also a mirror onto ourselves. Only if you are willing to use behavioral finance as a mirror — and only if you are willing to pay the necessary price, which is assessed in precious units of self-esteem and foregone management fees — can you really get anything good out of it”

To take advantage of the crowd, owners can’t be part of the crowd. They need to know they are making the right decisions and follow the process even if the results are disappointing.

Conclusion

I believe that behavioral economics can provide a great insight into the fantasy baseball game. The imperfections in the real world extend to this game we play. Understanding these biases and traits can be more helpful that positional rankings, sleeper lists, or even BOLD predictions. If owners have the time, I would at least spend 15 minutes reading the linked article and if they desire more read Thaler and/or Kahneman’s books which give a nice foundation on behavioral economics. I’ll end with one final quote: