Larry Bird & Loss Aversion

By Paul Copeland, CFA & Portfolio Manager

In the mid-80s my father was occasionally able to buy Celtics tickets from his employer. I thought $17 a ticket was quite expensive, but the seats were great, a few rows off the floor on a corner. And occasionally they came with a gift. One night the promotional give-away was a Celtics calendar. After the game, my cousin Tim and I went to get our calendars autographed in the Boston Garden parking lot. The players were gracious, but they were trying to get home, so you had to catch each of them before they got into their cars. Scott Wedman was a strong contributor to the team off the bench. He was about to sign Tim’s calendar, when Tim yelled “hey, it’s Larry Bird” and ran off leaving Scott with a pen in his hand.

We wouldn’t have caught Larry Bird with the other players if we had waited in the parking lot before the game. He was famous for his work ethic, practicing long before his teammates arrived at the required time for games. He said “I wasn’t real quick, and I wasn’t real strong. Some guys will just take off and it’s like, whoa. So I beat them with my mind and my fundamentals.”

He out-prepared his opponents, but he also beat them with his drive, putting his whole heart into the game as he dove on the floor for loose balls. He said, “Push yourself again and again. Don’t give an inch until the final buzzer sounds.”
The self-proclaimed “Hick from French Lick” used wisdom he gained growing up in rural America not only to win Championships and MVP awards as a player, he was also named Coach of the Year and later NBA Executive of the Year.

Another quote that I’ve seen attributed to Larry Bird is “I hate to lose more than I like to win.” I imagine this aversion to loss helped Larry Bird to win, but ironically, loss aversion leads many investors to lose.

Researchers estimate that the emotional pain of losses is twice as painful as the pleasure of gains. An example of this might be if someone gives me a bottle of wine, I get a positive feeling. If I drop that bottle of wine the bad feeling of my frustration is worse than the good feelings of getting the gift.

Our aversion to loss can lead us to take less risks, such as doing a cartwheel on a roof, speeding on 91, or putting all your money on Apple stock. While avoiding loss can increase our chance of survival, I see 3 ways that Loss Aversion can be harmful to people’s financial health.

1. It can prevent investors from unloading unprofitable investments because they feel they must get even and avoid a loss. It can even cause them to take additional risks to get even, like doubling down on a losing investment. Do not fight to the final buzzer on your losers. It could be a long game that’s detrimental to your financial health as you miss better opportunities. When looking at a loser, try to pretend you don’t own it. Would you buy the stock today? If not, then today might be a good time to sell.
2. A form of loss aversion that self-storage companies love is the Endowment Effect. Once people own something they irrationally overvalue it. That’s why my attic is filled with stuff that I refuse to sell in the garage sale my wife keeps suggesting. This happens with stocks – I see clients who are attached to a stock and won’t sell, even though it would be much better to diversify. The Endowment Effect can be very difficult to overcome as there might be strong emotional attachments. Maybe they received the family’s set of fine china or shares in the company their father worked at his whole life. Taking a picture of a favorite sweater or keeping just one of hundreds of army men are two techniques to help me lighten the load in our attic. Keeping at least a share of stock or selling it all but taking a picture of the certificate or your investment statement are two possible ways to deal with the Endowment Effect. Another idea might be to use a portion of the sale proceeds to help you remember the one who left you the stock. That could be done, for example, by making a gift to their favorite charity or taking a family trip to a place connected to them.
3. The third way I see Loss Aversion affecting people has become worse with greater access to information through cellphones, computers and 24- hour news channels. Elsewhere in this newsletter Todd Gray points out that the math of the stock market is in your favor, but stocks still do go down a little less than ½ of all trading days. Myopic Loss Aversion results when investors look at the market too often. The more often people watch the market, the more nervous they can become because they magnify the many little losses that they wouldn’t see over longer time periods. The downturns, which affect people twice as much as an equal upturn, incline investors to sell out of the stock market that over time has continued to increase.

Overcoming loss aversion completely is very difficult. Watching your investments and the markets less often, while relying on your advisor more for the investment decisions is a great way to mitigate it. Plus it will give you more time to get out and play some basketball or catch a Celtics game on TV, or maybe just a few Larry Bird classic moments on YouTube.