MARK RIEPE: I'm Mark Riepe.
I head up the Schwab Center for Financial Research, and this is Financial Decoder—our podcast about financial decisions and the cognitive and emotional biases that can cloud our judgment.
I'm recording this on the Thursday before the Super Bowl and I'm supposed to be recording segments for a future episode that will air in a few weeks.
Our producer Matt saw what I was recording and noticed I had a segment about the Super Bowl.
He told me that nobody is going to care about the Super Bowl in two weeks.
If I want to talk about the Super Bowl, I need to do it right now, before the game, or not at all.
So that's what I'm doing. Think of this as an extremely short bonus episode that is going to draw connections between an 18th-century mathematician, elite football players, famous athletic coaches, and a modern-day winner of the Nobel Prize in economics.
So here goes …
As I mentioned, the game is on Sunday, and after the game the winners will be deliriously happy, while the losers will be devastated with sadness.
The Kansas City Chiefs are playing, and I started thinking about their player and coaches who were with the team when they won in 2020 and 2023. If they win, will this most recent win feel as glorious as the 2020 win?
This question came up because today, February 8, is the anniversary of Daniel Bernoulli's birth in 1700. He matters because in 1738 he wrote an article entitled "Exposition of a New Theory on the Measurement of Risk."
This article's famous among decision theorists and economists for a few reasons, but I'll focus on just one of the concepts he introduced, and that's diminishing marginal utility.
He wrote, "Thus there is no doubt that a gain of one thousand ducats [that's a fancy medieval word for gold coins] is more significant to a pauper than to a rich man though both gain the same amount."
In other words, the utility (or emotional benefit) you get from a new thing diminishes as you have more and more of that thing already.
Now, Bernoulli was talking about wealth, but does it apply to Super Bowl victories?
In other words, with each incremental Super Bowl win in Tom Brady's collection, did the extra "utility" that Brady enjoyed drop just a little bit?
It's easy to make the case that it didn't. It's kind of like how parents think about their kids: each one is special in their own way.
It's entirely reasonable to think that maybe the diminishing marginal utility concept works with money and perhaps in other realms, but for rare events like Super Bowl victories, it probably doesn't.
I'm persuaded by that argument, but I'm not convinced.
The late basketball coach Bobby Knight said, "Everybody wants to win, but not everybody wants to prepare to win."
You see this kind of thinking echoed by sports commentators and analysts when they talk about a game where one team is especially hungry because they haven't had a taste of the ultimate prize, whereas the other team has already won multiple titles, and so that extra spark of motivation may be missing.
I'm positive sports analysts weren't thinking about Daniel Bernoulli or diminishing marginal utility, but what they're saying might just make sense.
Think of all that practice time, physical conditioning, and film study as the price to be paid for success. If you've already achieved the ultimate prize, are you willing to keep paying that price for a shot at more prizes in the future?
If the emotional payoff isn't as great, then maybe you aren't willing to pay as a high a price, and that's exactly what Bernoulli was getting at.
At least to me that's an intriguing rebuttal, but I think there's something missing in Bernoulli's way of thinking that's especially relevant in sports, and that something is loss aversion.
We now know that for most people a loss carries about 2.5 times the emotional punch compared to a gain. In other words, a loss hurts a lot more than a gain feels good.
I suspect that most football players go into a Super Bowl genuinely believing that their team is going to win. In other words, they've already added a win to their emotional bank account.
When it doesn't happen, it's a huge blow. In fact, it just might infect their thinking during the game because part of their brain is mulling over the dread of losing.
In sports you'll get an inkling of this when the announcers criticize a team by saying, "They're not playing to win. They're playing not to lose."
Now Bernoulli was obviously aware of losses. In fact, in his article, he used his analytical approach to analyze a well-known problem in gambling known as the St. Petersburg Paradox.
I think what his framework missed was the asymmetry between the emotional impact of gains and losses. It would take about 250 years before Nobel Prize winner Daniel Kahneman and Amos Tversky rectified that with their "prospect theory" model.
Now, I told you this would be short, so I've got to wrap this up.
So here's my take on all this.
I'm reminded of an answer that former Oakland Raiders coach and Super Bowl winner John Madden gave when asked why he retired from coaching.
He said that losses were terrible—unbelievably gut wrenching—but that never really changed over the years.
What changed were his emotions after wins. The exuberance that he experienced in his early years of coaching gradually fell. By the end, the predominant emotion he felt after a win was relief.
No joy, just relief that his team didn't lose.
Sounds like a case of diminishing marginal utility to me (so thank you, Daniel Bernoulli), but it's also a case study in how powerful losses loom in sports at the highest level of competition (thank you, Kahneman and Tversky).
So what will happen on Super Bowl Sunday? Are the Chiefs too fat and happy with their past successes?
Does the expected marginal utility from ring #3 provide just a little bit less juice than it used to compared to what the hyped-up 49ers will feel?
I've got no idea, but it seemed that the Chiefs didn't lack for motivation against Buffalo and Baltimore. Will that be enough for a victory?
Well, like I said, it's only Thursday evening. I've still got a few days to overanalyze the game some more before making my pick.
That's it for this episode, and we'll be back shortly with a new, more traditional episode.
Until then, if you'd like to learn about our investing and wealth management insights, you can find them at schwab.com/learn.
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