February 2024
IN THIS ISSUE
Is good news actually good news again?
Psychological shorts don’t pay the bills
Shorting is still a tough way to make a buck
Even Warren Buffett
Likelyhoods in the Super Bowl
The Super Bowl overtime coin flip decision is a modeler’s delight.
The Monday Morning Quarterbacks have been very one-sided about Shanahan’s supposedly illogical decision to take the ball first. “You win the coin toss, that’s what you get, you get the opportunity to have the advantage, and they handed it right over to us,” concluded Travis Kelce and basically everyone else (NFL fans convinced Kyle Shanahan didn't know Super Bowl overtime rules after coin toss decision in 49ers loss to Chiefs | The US Sun). These commentators make you wonder whether there is even another side to this debate.
But just like stock market commentary, sports commentary is high on overconfidence and short on statistical rigor.
Afterward Andy Reid deferentially concluded “I'm not going to question Kyle Shanahan” - although based on in-game reactions from the Chiefs players in particular it seems pretty clear that Reid would have taken the ball second.
Anyway, both coaches have said their respective statisticians analyzed whether taking the ball first or second is best. At a high level:
Taking the ball first means you operate in “3 down territory” and will be more likely to settle for a field goal rather than go for it on 4th down and risk not scoring at all.
Taking the ball second means you operate in “4 down territory”, with the benefit of knowing exactly what score you need to match or beat from the other team.
Taking the ball first means if both teams match scores, you have the chance to score any points and win the game.
If both teams match scores. That’s the conditional. Because taking the ball second means knowing exactly what it will take to not match scores. If both teams score touchdowns, would the second team go for the 2 point conversion rather than give the other team the ball with a score-anything-and-win opportunity?
Also, ESPN’s Bill Barnwell asks How could two different analytics departments come to different conclusions? One answer is that the choice is in fact sufficiently close to 50-50 that a minor adjustment in assumptions (high vs low scoring games, inconsistent play, player tiredness, run vs pass offenses, etc) can swing the optimal decision the other way.
Which brings us back to investment management.
Thinking in Likelyhoods means making probability-informed decisions that when played out over the long run are Likely to outperform.
Like Andy Reid, I will not question Kyle Shanahan’s coin flip decision - I suspect the choice is sufficiently close to 50-50 under most typical gameplay scenarios.
But I will question Kyle Shanahan’s willingness to deviate from what the analytics suggests is the optimal decision. Because over the long run, the probabilities will absolutely catch up with you.
Indeed, Shanahan has questioned the analytics before - Kyle Shanahan has an epic rant on analytics: 'If it's not automatic, just let me go with my gut' - just like active stock pickers question the strong evidence for indexing. Here are the sobering numbers from SPIVA through June 30, 2023 with the percentage of all Large-Cap funds that outperformed the S&P 500 Index over the past 1, 3, 5, 10 and 15 years:
Look at that downward trend. And yet active stock pickers confidently believe they possess the judgment to pick their way to outperforming the S&P 500 Index.
This downward trend of underperformance is what “the probabilities will absolutely catch up with you” looks like. The more time that passes, the farther behind those managers fall.
Unfortunately for Kyle Shanahan, Super Bowl coaches simply don’t have the benefit of many years and thousands of investment funds of data to see how picking against the analytics plays out in the long run.
For further reading on the consequences of not following the analytics: When doing nothing adds value (Likelyhoods, June 2022)
ONE MORE THING…
Is good news actually good news again? Powell would like investors to treat good news as good news: Morning Brief
Psychological shorts don’t pay the bills. Bill Ackman is still bitter about Herbalife.
Shorting is still a tough way to make a buck. 2023's Wild Ride: Short Sellers Take A $195 Billion Hit In US And Canadian Markets - JPMorgan Chase (NYSE:JPM) - Benzinga
Even Warren Buffett. Even Warren Buffett is no match for the S&P 500 - MarketWatch
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