Foolish Thinking, Well Sleeping

The 2006 season for Randy Moss was the worst of his career. The Oakland Raiders wide receiver was accustomed to, on average, 1,250+ receiving yards and 79 receptions per season through his first eight years in the National Football League - Hall of Fame type numbers. But in 2006? 553 yards on 42 receptions for the 29-year-old. 

Odd as it may seem, that’s not a young age for a position where speed is paramount, in a league where careers are short. So the Raiders traded Moss to the New England Patriots for a fourth round draft pick a few months ahead of the 2007 season.

Was this a bad decision? Do a quick Google search and you may see the Moss trade on “worst NFL trades” type lists, and find that Moss caught 98 passes for 1,493 yards and set an NFL record with 23 receiving touchdowns in 2007, for a team that went undefeated (until the Super Bowl, that is).

In big time sports, trades, signings, in-game coaching decisions, and more are heavily scrutinized after the fact. I found the comments section on Football Outsiders after the trade, and while many posters liked the trade, there were legitimate questions about Moss’s age, health, and whether he would be a good fit with the Patriots. A good trade for the Patriots? Sure. A biggest-steal-of-all-time-lol-Raiders move? Not in real time. 

Humans love to construct narratives in the aftermath of sports outcomes, and so much more. We make decisions and think the outcomes were obvious after the fact. This hindsight bias (“I should have known” syndrome) helps make sense of the world in our minds, and we frequently evaluate our decisions based on the results, even though the results are rarely easy to see ahead of time.

But is this the best way to evaluate decisions? (Narrator: No, it is not.) 

Annie Duke wrote a book on decision making called “Thinking in Bets,” a wonderful read on probabilistic thinking and avoiding the tendency to evaluate decisions based on results (“resulting,” Duke calls it). She persuasively argues for making decisions and evaluating those decisions based on the inputs, not the outputs, by looking at one’s thought process before the decision is made.

It’s an idea I learned about before reading the book, and one I attempt to use whenever I think of it (which isn’t often). I try to think about my process ahead of time, and if the process is sound, I also try not to beat myself up when the results don’t match. Process over results. Process over results. Think probabilistically. (No spelling error, Google? I didn’t just make up a word? Okay then.) 

And yet, even when we do a better job of evaluating decisions based on the process, not the results, that doesn’t always make us feel better.

Let me share a story of a time I used probabilistic thinking, got a decent result...and incurred considerable stress.

In March of 2018, I put my “enlightened” probabilistic thinking cap on when my home town of Omaha hosted the rounds of the NCAA basketball tournament that would determine a team to advance to the Final Four. Included in the bracket were powerhouse programs Duke (the No. 2 seed, facing No. 11 seed Syracuse) and Kansas (the No. 1 seed, facing No. 5 seed Clemson). 

Normally, I’m not a gambler, but I looked up the probability that Duke and Kansas would face off in the regional final to go to the Final Four. If I purchased tickets, and Duke and Kansas advanced to play each other, I was confident I could sell the tickets for a nice profit. (Oddly enough, I wasn’t super interested in simply going to the game and experiencing a one-of-a-kind sporting event for Omaha.)

Using the probabilities at fivethirtyeight.com, Kansas had a 73% chance to beat Clemson. Duke was an 85% likely winner over Syracuse. Multiply those two together, and you have a 62% chance that Duke and Kansas would meet in the regional final.

That’s a decent probability! So, I played the hand of cards. I purchased two tickets, and then watched the preceding two games with more interest than I ever had before in NCAA basketball.

The probabilities played out in my favor; Kansas defeated Clemson 80-76, and Duke prevailed 69-65 over Syracuse. I listed my tickets on a third party resale site at a much higher price...and then I waited. And waited. Only a couple of days remained before the showdown, and as the hours passed without a sale through the morning of the game, I was an absolute nervous wreck. 

My original purchase was not cheap ($1,500 or so), and the resale websites take a huge cut from each sale. The morning of the game, I was checking every ten minutes to see if my tickets sold, getting increasingly irritable and anxious.

From a numerical and probabilistic perspective, the decision wasn’t horrible. It was like playing a decent hand of cards.

But I didn’t evaluate the emotional side; I wasn’t prepared for the anxiety of potentially losing a not-small amount of money if the tickets didn’t sell at all (though I would go to the game then), or sold for significantly less than what I paid. As the morning of the game went along, I grew so desperate to sell and not take a huge loss that I started dropping the price.

Thankfully, finally, to my great relief, the tickets sold around noon of game day. I made $143 after fees, a decent, but not great, return. Was it worth it? (Narrator: No, it was not.)

In attempting to evaluate my decision, I failed to take into account other angles beyond just the mathematical probability (and I was lucky that there was a clear probability in the first place - that’s not the case most of the time). While this wasn’t the same thing as gambling - the odds were in my favor more so than “the house” - it was still a gamble of sorts, and I made a big bet. The probability itself wasn’t an error in “process over results,” but getting greedy and making a big bet definitely was.

So what’s a person to do? We engage in “resulting,” and mistakenly evaluate decisions based on outcomes (“Randy Moss - Worst Trade Ever!”). When we try to avoid resulting, we can still get burned (“I’m just playing a good hand of cards!”). Though I still recommend a “process over results” approach whenever possible, dealing with uncertainty is difficult regardless of the approach. 

When our money gets involved, add in our own emotional connections to money, and the uncertainty, anxiety, and difficulty involved can increase dramatically.

For many years, economics research assumed that humans make “rational” decisions with money and resources, that we optimize our decisions and do what provides the best result. Richard Thaler, a pioneer in a different field called behavioral economics, began collecting examples of people acting irrationally with their money. His book “Misbehaving” is an interesting look at the history of how humans actually act with finances.

Spoiler: We’re not rational, especially not with our money. 

Think about tax filing season. Many people choose to withhold larger-than-necessary amounts in taxes during the year, so they receive a large refund upon filing. The hyper-rational “Econs” mentioned by Thaler would cry out: “That isn’t rational! You’re giving an interest-free loan to the government! You’re ignoring the time value of money! You should strive for a refund of zero!” 

But people love to get refunds. Why is this? It’s “psychic” income. It feels like an extra pay day, even though the amount could have been added to paychecks throughout the year. If someone gets a $1,200 refund all at once, it feels better than getting an extra $100 per month in pay throughout the year. What’s more, since people have a tendency to spend that extra $100, forced savings via paycheck tax withholding isn’t actually a bad practice, as many use their refunds to save, pay off debt, or buy things they normally wouldn’t (which isn’t a bad thing!).

Thaler points out in “Misbehaving” one government policy proposal from his 1994 paper “Psychology and Savings Policies:”

The evidence suggests that when people get a windfall - and this seems to be the way people think about their tax refund, despite it being expected - they tend to save a larger proportion from it than they do from regular income, especially if the windfall is sizeable. So, my thinking was that if we gave people bigger refunds, we would generate more savings, whether or not we figured out a way to make it easier to funnel those refunds into IRA saving.

Bill Sweet, CFO for Ritholtz Wealth Management, had a helpful Tweet thread about this in 2019 - a time when many were upset about receiving smaller refunds from newly-enacted tax law changes, despite having a lower tax liability. (Screen shots of the thread shown at the end of this post in case the Tweet is removed in the future.)

So what’s the point of all of this? Our finances are extremely personal (Narrator: duh). “Rational” or “optimal” money decisions can still take a toll on our emotions and increase stress. “Irrational” decisions can give us a feeling of satisfaction. 

Given these tendencies, one of my favorite tests or frameworks for money is the “Sleep Test.” Whatever helps you to sleep better at night, generally speaking, do that. I didn’t consider the Sleep Test with my ticket resale scheme. Many sleep better knowing they’ll get a sizeable chunk of money soon after filing their taxes. Keeping extra cash on hand - even beyond what’s necessary - can help us feel more financially stable, whether we’re wealthy or not.

The Sleep Test isn’t perfect; it doesn’t mean we willfully ignore potential problems to help us feel better. But it can help reduce financial stress and increase contentment. The trade-off of less-optimal finances in exchange for peace of mind is always worth it.

Postscript: Bill Sweet’s Tweet thread on tax refunds