Are we addicted to winning?
Illustration: Superolli. Source: Openclipart
We see it every week: glowing reviews of great stars and managers; the adoration or condemnation of home and rival teams; and the endless hours of watching the game and commentary and replay and analysis of their performance in the arena. And that’s before the stock market even opens. No, this isn’t about football, this is about investing and markets.
There are lots of parallels between sports and investing. Both require preparation, discipline, technical skill, and endurance. Both can lead us on an emotional roller-coaster. Both have self-serving innovation, hype, legends, and goats. And both disciplines have to deal with biased referees, judges that – instead of making impartial calls – tend to favor one side or the other in a contest.
In 2016 a couple of economists studied “referee bias” in professional football, soccer, and other sports. They found a persistent trend toward favoring the home team. More penalties were called on visitors; more yardage was awarded to the home team, and so on. More heavily attended games tend to get more biased calls; the refs want – possibly subconsciously – to be “liked” by a large (& noisy) crowd of home fans. No one enjoys the abuse and threats that an angry mob might dish out after an unpopular call.
We see this in the markets as well. Our “referees” – the Federal Reserve and other regulatory – have become invested in the outcome of the markets. When Fed officials speak, we hear them using normative language about their policies: “get inflation going the ‘right’ way”, “hopefully markets will understand”, “substantial progress”, and so on. Rather than making proactive policy that strengthens the long-run potential of the economy, the Fed indulges in policy pronouncements that support markets every time there’s a minor hiccup. Two decades ago this was labeled the “Greenspan Put,” when Alan Greenspan’s Fed helped coordinate the bailout of a large hedge fund. The Greenspan Put later became the Bernanke, Yellen, and Powell Puts as successive Chairs continue to intervene.
Time Magazine cover from 1999. Fair Use.
But the Fed isn’t the real problem. They’re just the referees on the field, responding to a political culture that will not tolerate even a minor recession. But recessions are necessary to any economy. They function like small brushfires, clearing out the “deadwood,” liquidating bad debts and clearing out zombie companies that stifle innovation and growth.
Seventy-seven years ago, George S. Patton summarized this preference in his famous speech to the Third Army:
“When you were kids, you all admired the champion marble shooter, the fastest runner, the big-league ball players, and the toughest boxers. Americans love a winner and will not tolerate a loser. Americans play to win all the time. That’s why Americans have never lost and will never lose a war. The very thought of losing is hateful to Americans.”
While the notion of competition and determination are always helpful, I think Patton would agree that having an umpire who consistently tilts the playing field is harmful to the long-term health of the game.
The most profound difference between sports and markets is that while sports are zero-sum – for every winner there *must* be a loser – markets are positive-sum. The process of price discovery, of competitive innovation, of serving customers and clients better than the next business over, has significant positive add-on effects. The competitive nature of our markets and economy is one of the major reasons why the US economy is more efficient, more productive, and more highly paid than almost any other major economy in the rest of the world.
To succeed, we need to compete. But for competition to mean anything, failure must be possible. Anything less is like lifting weights using Styrofoam. It may look good, but it won’t make us strong.