My first job out of college was working on the investment analytics team for a major asset management firm in the Midwest. It was, for the most part, a tremendously boring job where I sat at a desk all day and looked at spreadsheets. My boss was horrible and finance was not for me, and before long I had moved onto greener pastures.
However, I worked with several very talented and insightful folks and managed to learn a few valuable lessons during my time there. You see, my job on the analytics team was to help the mutual funds’ managers at my firm manage their exposure to undue risk and to help them make better decisions in the hope of exceeding their fund’s benchmark (i.e. the S&P500, Russell 2000, etc.) Specifically, we often analyzed their decisions (i.e. deciding whether to buy or sell a particular stock) and provided feedback on whether their decision was the right one given the timing and given their goals. This provided a unique vantage point, and as much as we may try, many of us fail to consistently and fairly evaluate our decision making process in this manner.
At some point during my time there, a coworker of mine lent me a book (can’t remember the name of it for the life of me) that was all about the mechanisms that underpin our decision making and the pitfalls that poor decision making can have when investing. At its heart, investing is really a game of prediction, albeit a game that often has plenty of money at stake. The same can be said for fantasy football, which means that we often fall prey to the same behavioral biases whether we’re setting our lineups or making trades with our fake teams or whether we’re deciding to buy or sell a stock or invest in an index fund.
One important caveat — although many of the decision making biases we see in investing and fantasy football are similar, the rules of the game are not the same. (Quick note: I am not a certified financial adviser so please do not read any of the advice within this column as personalized investment advice.) In investing, many people, provided they have sufficient time, investment capital, and good advice, have historically had decent luck meeting personal modest financial goals. In other words, the market has enabled many people to reach their goals. In traditional season-long or dynasty fantasy football league formats, on the other hand, the pool of winners is often limited to a small fraction of the participants and is very concentrated towards the top (quick aside — let’s not confuse wealth and investing success here. Wealth inequality and concentration is very high in the United States; however, the average index fund investor often does no worse than most wealthy investors, when measuring average annual return on investment as a percentage, wealth inequality is only exacerbated due to the nature of compound interest and the difference in initial investment capital.) In fantasy football, there will always be a clear separation of winners and losers, when viewing success from a return on investment. Take a look at the charts below showing the 2019 return for each stock in the S&P500. The point of this chart is not to suggest the S&P500 is always a good investment; some years it certainly is not. Rather the point is that mainstream stock performance is often relatively correlated, and index fund performance is even more correlated, meaning that it is possible for many stocks and funds to do well in a single year. This affects the way that many people invest, choosing index funds that track benchmarks like the S&P500 to guarantee themselves returns that are average, relatively speaking.
Contrast the chart above with the chart below, which shows the vastly divergent outcomes of fantasy football teams in a single season. The median outcome in the example below is -100%, which equates to losing all your money. In common league payout structures, finishing 5th and finishing last provide the same financial result: nothing.
Here is the crucial point: if you are seeking to exceed the median outcome, either in investing or in fantasy football, you must be willing to take more risk by investing in assets with greater variance (assuming your leaguemates are sharp enough that you aren’t able to draft a team that is head-and-shoulders better than theirs based on consensus projections). In investing you may be perfectly happy with the median outcome, in which case you could invest in an index fund that tracks a common benchmark like the S&P500, ensuring yourself zero variance versus the benchmark outcome. However, as noted above, the median outcome in fantasy football is not a profitable outcome; therefore we must seek variance. Only problem is, it is not always easy to predict which assets provide the most variance, or specifically upside. There are however, some edges that indicate variance that can provide upside. Fantasy analyst JJ Zachariason from NumberFire always talks about targeting ambiguous situations to find players who will benefit greatly if things go their way.
Another way to identify players with high variance is to invest in players who have a limited track record or that are unproven in the league, typically either rookies or 2nd/3rd year players. There is often uncertainty about how a player’s skills will translate from the college game to the pro game, and you can capitalize on that uncertainty and potential upside by investing in such players. These players often do not require much investment and can be dropped without much ado once it is clear they will not provide much upside. Plus if you can afford to place the player on your bench early in the season while uncertainty is high, you will not directly suffer from poor performances, providing a low-risk, high-reward opportunity.
Another major way to identify variance or upside versus consensus would be via an informational advantage, knowing something that other people don’t. In investing this is known as insider trading and is expressly prohibited. In fantasy, informational advantages are simply hard to come by, at least reliably, given how much information is provided freely to the public by media members or fantasy analysts.
I want to summarize by stating that you should not manage your investment portfolio the same way that you manage your fantasy football team and hopefully that is clear from what I’ve outlined above. Okay, now that we’ve established the different incentive structures that define investing and fantasy football, we are ready to talk about the different mistakes that both investors and fantasy football managers make due to common behavioral biases.
Please stay tuned for Part 2 where I will discuss the specific behavioral biases that affect us as humans, what they look like in practice, and most importantly, techniques for avoiding them.