Loss Aversion and Incentives Omission Bias Evaluating Talent Momentum vs. Luck
Loss Aversion and Incentives In 4 th down situations where (statistically) its better to go for it, NFL coaches punt/kick 96% of the time There are some exceptions... But didnt used to be this way
2009 Patriots vs. Colts 4 th and 2 on own 28 yard line, up 34-28 *embed movie of play here*
Deviating from convention can be risky My vocabulary is not big enough to describe the insanity of this decisionTrent Dilfer, former NFL QB and ESPN analyst Ghastly... Too smart for his own good this time. The sin of hubrisDan Shaughnessy, Boston Globe Fourth-and-jack-ass. Thats our name for a now- infamous play in New England Patriots history Pete Prisco, CBS
14 Evaluating Talent Early picks are very highly valued: #1 = #10+#11 = #29+#30+#31+#32 You have to pay about the same Does this match future performance?
15 Probability Better Than The Next Guy Average=.52
Evaluating Talent is Risky 9 of last 12 #1 picks have been QBs
Who Else Could You Have Had? =+ a 3 rd round pick = +
Evaluating Talent in the NFL What were the #1s worth? 1x 6,000x 2x 1.5x 3x
Evaluating Talent How do you hire and fire people? How confident are you in your ability to judge performance?
The Myth of Momentum Quiz #1: Which of the following is the best predictor? a)Performance over last 5 attempts b)Performance over last 5 games c)Performance over last month d)Performance over season e)Performance over multiple seasons
The Myth of Momentum Quiz #2: Heading into playoffs, which of the following is the best predictor of success? a)Performance in most recent game b)Performance in last week c)Performance in last month d)Performance over entire regular season
Fooled by Randomness Flip a coin 10 times... Which sequence is more likely to be random? 1.HTHTHTHTHT 2.HHHHHHHHHH 3.HHHTHHTTHT Which Lotto number is more likely to win? 1.99999 2.13679
Damned Statistics What does 4 out of his last 5 really mean? Is a player 0 for 12 due to hit his 13 th or doomed to miss it? Situational or conditional statistics
24 Momentum in Financial Markets Momentum is the phenomenon that stocks which have performed well in the past relative to other stocks (winners) continue to perform well in the future, and stocks that have performed relatively poorly (losers) continue to perform poorly. 24
25 Academic Discovery Jegadeesh and Titman 1993 Asness 1994 1996 Chan, Jegadeesh, and Lakonishok Fama and French: …[T]he main embarrassment of the three-factor model, [is] its failure to capture the continuation of short-term returns documented by Jegadeesh and Titman and Asness…[T]he continuation anomaly exposes one of its shortcomings. 1999 Moskowitz and Grinblatt 2004 Grinblatt and Moskowitz 2008 Asness, Moskowitz and Pedersen 6 new working papers from AQR 2011
26 Historical Evidence from Academia Average Returns for Portfolios Grouped by Momentum 1927 – 2009 *Source: CRSP Database. Data is based on monthly returns from overlapping portfolios. Momentum is calculated by ranking stocks based on their past 12-month return excluding the most recent month. Returns are in excess of the beta-adjusted CRSP Value Weighted Index. Past performance is not an indication of future performance.
27 Momentum is the Fourth Factor SmB Factor is a long-short portfolio composed of small stocks minus big stocks by market capitalization. HmL Factor is a long-short portfolio composed of stocks with high book to price valuations minus stocks with low book to price valuations. UmD is a long-short portfolio composed of stocks with positive momentum minus stocks with negative momentum by looking at the last twelve months price return excluding the last month. Past performance is not an indication of future performance. Since the mid-1990s, the standard for any asset pricing study is to adjust for 4 factors (betas): Size ValueMomentum Annualized Return (%) 27
Out of Sample Evidence Small and large cap stocks Industries Bonds Currencies Index futures Commodities Corporate bonds Emerging markets (all asset classes) REITS