Falling in Love Can Cost You Big Time

I just read a really interesting article in Financial Advisor magazine, “Don’t Fall in Love with One Player: Behavioral Finance Lessons from the NFL Draft” by Lorie Konish. She explores how Richard H. Thaler, the world renowned professor of behavioral science and economics at the University of Chicago Booth School of Business and co-author of the new bestseller Nudge, has investigated his hunch that NFL teams so overvalue picking early in the draft that they end up paying too much for their top draft picks. As it turns out, Thaler finds that emotions can botch NFL draft decisions in the same way they can harm your investment decisions.

Konish reports from the Investment Management Consultants Association’s (IMCA) annual conference. There, Thaler discussed how, in order to get the second pick in this year’s NFL draft, the Redskins sacrificed their first round pick next year, their first round pick the following year, and their second round pick this year. According to Thaler, because the team gave up so much to secure the number two pick this year, the Redskins likely will be more than willing to pay a “huge price” for their top pick, quarterback Robert Griffin III (RG3), the Heisman Trophy winner from Baylor University.

According to Thaler, it’s not a smart strategy to pay to move up in the draft. In fact, he says, teams would be better off, financially at least, if they traded down. In fact, Konish reports that Thaler, who already advises one NFL team on its draft decisions, noted at the conference that teams that trade a third round pick for a second round pick this year will pay an interest rate for advancing that one round of 176 percent.

“These football team owners are all billionaires,” Thaler said. “I think it’s safe to assume that they didn’t get to be billionaires by borrowing at 176% rate of interest. But they’re so desperate to win that they get emotional and fall in love with a player.”

Teams fall in love with players the same way investors fall in love with stocks. The Redskins, who pulled out all the stops to get RG3, may overpay their new quarterback and consequently negatively impact the team’s future financial health. Similarly, individual investors, moved by headlines touting the hot stock of the moment will often overpay for the stock and later steadfastly ignore any bad news about their favorite company in the same way loyal sports fans stick by their favorite players. Watching our behavioral tendencies play out on the field may make them easier to spot and correct in our portfolios.