It turns out, that we are all fairly predictably irrational. I have listed below five common thinking biases that can hinder our ability to make logical decisions and how to combat them on Football Index. We all suffer from these and no-one is totally immune from them. But once you know about the most common thinking biases, it is easier to recognise when you are doing them and know how to overcome them. Hopefully this means making more money as a result.
The Recency Effect
Have you ever noticed how popstars play a lot of the rubbish songs in the middle of their gig before ending the show with their biggest hit? They are capitalising on a thinking bias known as the Recency Effect. This also plays a key role in the mindset of traders on football index.
The Recency Effect describes how people are more likely to remember the last thing that happened, and as such place too much weight on the likelihood of it happening again in the future. Let’s take a hypothetical player as an example. If he has a 10% chance of winning PB dividends on any given matchday, then this means there is a good chance that he will go several games without winning. Yet despite this being what is expected, it often leads to the famous ‘Monday morning sell-off’. Likewise, if he wins PB dividends on the weekend, which remember we would expect him to do 1 in 10 times, then he is likely to get a rise in price. But fundamentally nothing has really changed in terms of his value, it’s just that we weigh his recent win (or lack thereof) higher in our mind.
How can traders combat this? Knowledge of data and probability really help. It can help you trade more logically and less impulsively which means less over-trading, less impulse buying and less instant selling (which eats into profit margins so much). This is one of the reasons why I couldn’t imagine trading without IndexGain as it can help us all improve our understanding of the likelihood of past events happening again.
Let’s say you wanted to buy a vacuum cleaner and have a choice of two. One is priced at £100. The other is advertised as originally being priced at £300 but is now available for a knockdown price of £125. The original price of the second vacuum cleaner (£300) is anchored in your mind, which makes its current price of £125 seem more appealing than the first vacuum priced at £100. But for all we know that £300 vacuum cleaner may have been horrifically over-priced (and at worse may only have been at that higher price for a short period of time last week). This is known as anchoring, which is where a largely irrelevant number becomes a reference point for later decisions.
What’s fascinating is this that research has shown that it doesn’t even matter if the first anchored number relates to the second. For example, studies have shown that if you get people to think of an irrelevant number (i.e. the last two digits of your mobile phone number) and then ask them to state what’s the most they would pay for a bottle of wine, those who had a high 2 digit number from their phone were more likely to pay more. Even though logically one has nothing to do with the other.
I can think of three main examples of this happening on Football Index. The first is how far away a player is off their peak-price is a common one – despite this peak price being based on an event that is incredibly unlikely to happen again. This creates a misleading narrative of their value, as this peak price becomes the key comparison. The second is the price a player is bought for. As this price remains constant in our portfolio (assuming you don’t top up) it serves a constant reference point, which can cloud the more important number which is their current sell price.
The third and final example of anchoring is how irrelevant data gets in the way of our decision making. For example, I personally prefer regular PB peaks over high PB averages (i.e. would rather own a player who scores 250, 50, 250, 50 in the last four matches than one who scores 160 in each one). So trying not to be seduced by high sounding PB averages is important to me. A good way to overcome the anchoring effect is to decide what your trading style is and pinpoint which data available on IndexGain matters most to you. This will help you separate the signal from the noise.
FOMO + The Bandwagon Effect
These are two separate but related thinking biases that we all suffer from. FOMO is the fear of missing out and the Bandwagon Effect is when we follow the crowd’s decision (and thus abdicate personal responsibility for our choices). There is a very thin line between feasting on the current trend and scrambling for left-over scraps. Football Index is set up, in part, to maximise our FOMO and desire to follow the crowd. This is why there is a trending list, a live ticker of player purchases and a general buzz in the build up to IPOs.
No doubt, there is money to be made by getting in on trends, but long-term you have to play the game your way. Far better to be at the start of the next wave then being on the dip of the last one. If you are going to trade heavily on other traders suffering from the bandwagon effect, then timing your exit is important. This is because the ‘value’ of the players in these trades is drawn upon what others are willing to pay for them, and not what money they can generate themselves through dividends (which is their intrinsic value). This means if you don’t time your exit well (often a bit of skill but mainly a lot of luck is required here), you may be left holding a player who in a few weeks’ time feels over-priced as he has little intrinsic value.
The Halo/Horn Effect
The Halo and Horn Effect describes how our first impressions tend to result in lasting impressions. This is why changing our minds about someone or something is so hard. If it is a good first impression this is known as a ‘Halo Effect’ and likewise if it is a bad one, it is known as the ‘Horn Effect’. This is a real challenge for traders on Football Index as both the index itself and football are both very fluid. A player might have been a poor fit for the last matrix but is suddenly is a better one for the new one. A managerial change, a new team-mate being transferred into the team, a positional change or a big change in price can all make a player who didn’t seem good value before now appear so.
Not being too rigid and fixed to previous sentiment is important here. The risk to this is that the pendulum swings too much the other way and indecision/flip-flopping with your port can occur. There is a phrase in the army which states ‘no plan survives first contact’. What this means is that you have to have a plan going into war but likewise have the flexibility to change it on the battlefield if required. Trading on Football Index requires a similar mindset.
The Dunning-Kruger Effect
I have saved my favourite thinking bias for last. The Dunning-Kruger Effect describes how there is an inverse relationship between confidence and competence. This means that this least competent tend to be over-confident (‘No risk’/ ‘the only way is up’/no downside’ etc) whereas experts, as they know more, are more likely to understand the risk, nuances, randomness of chance with what they are doing. This is particularly fascinating with reference to Football Index, as the very large majority are making money due it to be a growth market at this period of time. Therefore, this fuels over-confidence as we all have previous successes to point towards.
There are two ways I think that can help overcome the Dunning-Kruger Effect. The first, is to track yourself against the market. This allows you to see if your successes are due to your trading skill or just a case of ‘a rising tide lifts all boats’. The second, is to engage with people who a) make you really question yourself (as this will help you avoid an echo chamber) and b) follow people on social media who help you really understand the mechanics of the market and not just those who talk about players they own. This will help improve your competence, not just your confidence.
Gambling will always be an emotional thing and as such likely to fall prey to these common thinking biases. It wouldn’t be fun if we just ran the numbers and betted accordingly. Players passing the eye test, backing your gut and occasionally taking riskier bets than you normally would is part of what makes it enjoyable. The aim isn’t to be devoid of our emotions, but instead to know where our blind spots are and try to limit their impact so as to maximise returns.