I have often felt that fantasy baseball presents a good analogy to financial investing. The players of course would be the stocks and our teams would be our portfolios.
I know next to nothing about evaluating a stock but I imagine some of the forecasting principles have similar structures. When looking at a stock there are certain "indicators"that can help you judge and predict its level of performance. Much the same is true in baseball with players.
One thing that I know the two activities have in common is that, for most, it is almost impossible to separate emotion from the equation. Fantasy baseball, like buying stocks, is a human endeavor and therefore has a very large human element.
I found one site that talked about common mistakes investors make when choosing stocks, mistakes of emotion and perception that undermine all the solid evaluation we all try to practice. Many of you many recognize these.
Let's see if we can find ourselves, or others, in these common mistakes...
Investors may overestimate their skills; attributing success to ability they don't possess and seeing order in information or data where it doesn't exist.
This is about recognizing your limitations and weaknesses. The danger is taking too much credit for your successes and not enough blame for your misses. Identify weak areas of your game and seek counsel until you improve your skills. Meanwhile ... improve your skills. Do not simply shrug off success or failure. Whether it is an autopsy or debriefing, looking back to see where you hit or missed with the information you had at the time, is generally a very worthwhile exercise. Knowing the end result can often help you find things in the numbers that should have led you to the right conclusion if you didn't simply pass on the work, or give the most important information less weight than it deserved. It is not always enough to know if something worked or it did not. It is important to know why.
Having expressed a preference for an investment, people often distort any other information in order to add weight to their decision.
To an extent, we all predetermine the outcome of our player evaluations, especially if we have publicly expressed our predetermined evaluation. After that, we weight information that supports that evaluation more than information that does not. The reoccurring theme here is a drum I beat pretty regularly, which is that you must constantly challenge what you believe to be true. Drop your "truths"for a while and recheck the facts with an open mind.
Investors are often unable to alter long-held beliefs, even when confronted with overwhelming evidence that they should. They fall in love with their investments, rationalize losses, or hang on too long to sell.
This is about "dropping your truths"again and certifying what you "know"every now and again. Those that stuck doggedly to outdated concepts such as "You can never, ever get anything out of a rookie, especially rookie pitchers"or "You cannot be a productive offensive player if you strikeout too much or don't walk enough", often miss out on special players because special players show the flaw in absolute thinking. This principle also holds true in terms of letting go of failing veterans.
People tend to remember their successes and minimize or forget their failures.
This is true in all of us, and more to the point, we often try to recreate our successes with situations that aren't similar. We tend to bang square pegs into round holes to make one player seem like another that we had success with in the past. In real baseball perhaps Theo did just that with Wily Mo Pena, remembering David Ortiz.
Most investors will avoid risk when there is the chance of a certain gain. But faced with a certain loss, they become risk takers
Truer in the fantasy trade market, owners tend to get very conservative when they have a strong team. At the trade deadline, they fear "screwing things up"and pass on trades or claims that could make them incrementally better. Of course, risk and reward play a role here, but many leading teams are caught when teams in 3rd, 4th, and 5th, at the trade deadline boldly improve their teams by taking on risk, while the leaders play it very close to the vest. There is no team that could not be better, and you don't have to hit a homerun on every deal. The moral is to never stop improving, even if it is a small improvement.
People tend to think in extremes - the highly probable news is considered certain, while the improbable is considered impossible.
In our line of work we are talking about how much we trust what we see. Should we believe Brandon is the new Babe Ruth? Of course not. But at the same time we should look at a Carlos Pena and be open to the possibility that his level of performance is legit. Again, it's about having an open mind ... and not just about extreme possibilities. In fact quite often when you have questions regarding a player they are usually expressed in black or white. "Is he this good or will he flop?"... "Will he have a good year or is he done?"... You have to open your mind to the space in between because that is where most of the answers lie. Trying to define answers in extremes just gets us back to the whole square peg/round hole thing, which requires biases on your part to make them fit. Biases lead to inaccurate conclusions.
Investors often take a short-term viewpoint.
Too many owners think a player is what his last two, three, or four weeks says he is, especially at this time of the year. This is very rarely the case of course but we all know owners who do it. A player owns his entire history and looking at it from different angles will give you entirely different viewpoints. If you look at three weeks worth of a player, and three months, and three years, and get entirely different answers, you absolutely need to figure out why. You also need to figure out what that probably means for the next three months, and even three years in keeper leagues (even if you don't keep him you probably want to trade him and a better player is easier and more profitable to trade), because remember, the only stats that really matter are the ones that haven't happened yet.
Investors follow the crowd, and are heavily influenced by other investors or compelling news; they fail to check out the real facts
Herd mentality. When everyone in the league has the same sources and leans heavily on them, every owner acts like every other owner. It is always good to have your own methods and sources so you can verify what the crowd thinks. No matter what happens (Carlos Pena) a constant and methodical approach will keep you from being led astray by peer pressure.
Investors make predictions based on limited information.
This one is like the old joke about three blind men feeling a different part of an elephant. One holds the trunk and thinks he is feeling a snake. Another touches a leg and thinks he is feeling a tree a tree, etc. Limited information, whether from lack of information, or from bias, leads to wrong answers. It is just that simple. The good news is that this kind of thinking is profit margin for those of us who can avoid it.
Investments are often thought of as pieces of paper rather than part ownership of a company.
With this one, we circle around to the beginning. We very strongly tend, in this day and age of stats about stats, to see players as a simple grid of numbers instead of what they are ... real live people. What will the atmosphere at Fenway do for Julio Felipe Lopez Lugo as he leaves twenty thousand sleepy fans but in Florida and forty thousand indifferent fans at Chavez Ravine? I don't know, but the answer won't be found in his splits. What we are dealing with here are people.
If we cannot eliminate the human element from how we evaluate players and how we play the game, how can we expect the players to eliminate the human element from how they play their game. The answer is that we can't. But even if we could eliminate the human element... or if they could ... neither game would be worth playing anyway. That is where all the real fun is.
