MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
For this episode, we're doing something different. We're succumbing to Olympic fever and taking on the Olympic Games.
If you're like my wife, you're asking, "That makes no sense. Why are you doing this?" There are three answers.
First, why not?
Second, it's the Olympic Games, after all. Starting July 26th, 10,500 athletes will compete in 32 sports over 19 days.[1] More than 3 billion viewers around the world are expected to tune in.[2]
Third, and this is the real reason, decision-making biases affect many aspects of the Olympics. Some of them you may have guessed already, but hopefully we've come up with a few that will surprise you.
Most importantly, I hope that you can take some of these lessons and see how they apply to the types of financial decisions we all make day in and day out.
First up is the selection of the host city. The Olympics are just as much about the host city as they are about the games themselves. It's an opportunity to showcase to a global viewing audience all that is right about the city and its people. The way I think about it, the Olympics really begin during the selection process for the city.
And this takes place years before the opening ceremony, as candidate cities submit bids to host the games, and the International Olympic Committee, or IOC, awards the games to one of them.
Understandably there is euphoria when a city first hears that it's been selected. But then the real work begins. It's time to figure out how to organize everything that's necessary to host the games, and that requires project planning on an epic scale.
We've done episodes in the past on why it's hard to plan.
First, people are overoptimistic. It's easier to think of things that will go right than it is to think of things that will go wrong. And that means not enough contingencies are put in place.
Second, overoptimism gets intertwined with overconfidence. By that I mean we think we're better at forecasting the future than we really are. We also don't seek out contrary opinions that point out the gaps or flaws in our thinking. Put these together, and you get something known as the "planning fallacy."
It refers to the fact that even experienced people who have done project forecasting and are fully aware of the pitfalls still make the same mistakes and produce projects that are late, over budget, and fail to deliver the full functionality that planners promised.
In the early days of the Olympics, planning was relatively easy. For one thing, the majority of host cities were in Europe or the United States—developed countries that had larger economies and more advanced infrastructures.
By the 1970s, things had changed. Riskier cities were winning the competition to host the games, and the games themselves were getting larger, with more events and athletes.
A 2012 University of Oxford study[3] estimated an average cost overrun of 252% for each Summer Olympics since 1976, after adjusting for inflation. The study found that "the expenses of hosting the Olympics are ever increasing; we are now seeing costs of double-digit billions."
Cost overruns are so enormous, they're comparable to the costs associated with, and again I'm quoting here, "deep disasters such as earthquakes, tsunamis, pandemics, and wars."
Montreal, host of the 1976 games, became a poster child for host-city cost overruns and took nearly three decades to pay off its $1.5 billion debt.[4]
The lesson for you is to avoid being like these cities when planning for a major life event that'll have big implications for your financial life. Think about what could go wrong with your plan and make contingencies. Share your plans with people who can look at it with a critical eye and offer constructive advice to improve it.
Finally, build some slack into your plan to give yourself a buffer against events that are essentially unforecastable.
Let's move on. After the elaborate and occasionally bizarre opening ceremonies, the competitions begin. Some events are timed—for example, running races—and the clock determines the winner.
In some sports—for example, gymnastics, diving, and skateboarding—the athletes are judged. And while the sports federations that run the events try to make the judging as objective as possible, it's a losing battle.
There's always going to be a subjective element, and when people are judging other people that's fertile ground for cognitive and emotional biases.
Here are a few biases that are relevant to judging. The first is the order bias. The order bias refers to the situation where going first or last in a competition is an advantage, depending on the judge or judges. And it can be broken down into two other biases: the recency bias and the primacy bias.
Generally speaking, we tend to easily remember the first and last items or performances in a sequence,[5] and that creates a situation where judges tend to evaluate the first and last athlete more positively.[6]
But there are other nuances to the order bias. For example, if the recency bias is dominant, then the athlete doesn't want to go early in the competition, because the judges hold back high scores because they want to leave room in case someone comes along later and does better.
This has been studied in both dressage—that's the event where the horses kind of dance around—and figure skating. One study evaluated figure skating competitions and found that skaters who went later had significantly higher scores than those who had skated earlier.[7]
But the opposite can also be true. If the judge experiences the primacy bias, then they'll evaluate athletes performing at the beginning of a competition more highly.
Unfortunately, we didn't find any studies where the primacy bias was studied for individual Olympic events.
Other biases can affect the judging of athletes performing, as they say, "in sequence."
One is the assimilation effect, which is when the current score a judge is formulating is affected by the score they gave to the previous athlete.
If the gymnast before you got a high score, the judge is more likely to evaluate your routine more generously.[8] The idea is that initial similarities lead people to search for more of them. The judge is looking for positive attributes in your tricks. The assimilation effect has been looked at for both gymnastics and synchronized swimming.
There is though something called the contrast effect.
If the judge is prone to the contrast effect, giving a high score to one athlete can make the judge recalibrate for the next competitor and be harder on them.[9] In this case, the judge is looking for differences rather than similarities.
In other words, you're better off if the person right before you got a lower score because you'll look better in the judge's eyes. This has also been examined for gymnastics and in diving.
Overall, the good news is that some of the biases will pull a score higher, and others will pull it lower. This helps explain why it's good to have a large panel of competent judges who are trying to be objective and not let their national affiliations cloud their judgment.
The bigger the panel, the more likely these quirky biases get averaged out.
Finally, practices like dropping high and low scores from the judging panel also helps by booting out the extremes, which are more likely to have been affected by these biases.
It also helps deal with any latent feelings, positive or negative, that a judge may have toward an athlete or the athlete's country.
Is any of this relevant to your financial decision-making? I think it is.
We all operate as a judge in our life, and being aware of these biases will help us be better at the job.
For example, let say you're evaluating financial advisors to hire. Essentially, you're judging each one and picking the best. When you're evaluating a group of stocks and deciding which ones to buy, you're performing a judicial function.
Are you in the market for a new house? You're essentially judging each listing that you examine. Are you a manager and about to start a search for a new employee? You're playing the role of judge by judging which candidate is the best fit.
I could go on and on, but the point is that we judge things all the time, and all the empirical work about judges from a sporting context is applicable to other areas of our life, especially financial decisions.
Before we continue, I want to take a moment to encourage listeners to reach out to me on X, formerly known as Twitter, through my handle @MarkRiepe, M-A-R-K-R-I-E-P-E. You can send me your thoughts on the show, suggestions on what you'd like to learn about in the future, or just put an interesting study on my radar.
Also, for those listening on Spotify, you can submit a comment on specific episodes in the app, so consider submitting follow-up questions to episode topics that left you wanting a little bit more.
I'll put links to both platforms in the show notes. Thanks, and enjoy the second half of the episode.
Enough about judges. Let's talk about the audiences. This isn't a bias, but there is something known as the underdog effect.
It causes us to love and cheer for athletes and teams who are not expected to win or cheer competitors who show grit and perseverance long after the chance to win is gone.
Some of you might remember Derek Redmond, a sprinter and member of Great Britain's 4 x 400-meter relay team, winner of the 1991 World Championships and veteran of two Olympics. For a decade, he was one of Britain's most famous athletes.
But what he's most known for is the 1992 Summer Olympics in Barcelona, where, in the semi-finals of the 400 meters, he tore his hamstring at the half-way point of the race and fell to his knees.
Determined to finish, he got up, hobbled on, and his father ran onto the track and helped Derek finish the race while the crowd stood and cheered.[10]
Another example is Michael "Eddie" Edwards, or "Eddie the Eagle." He was from a working-class family in England and dreamed of being an Olympian. In his teens, he took up alpine skiing but failed to qualify for the British team.
So, he switched to ski jumping because Britain didn't have a team, and so there was no competition. He struggled to make ends meet, used borrowed equipment, but kept training and competing.
Even though he came in last at the 1987 World Championships, he managed to meet the Olympic standard of jumping distance.
Eddie was Great Britain's only Olympic ski jumper in 1988 and competed in the Calgary games. He finished last in both the 70- and 90-meter events but became a worldwide sensation.
The Jamaican bobsled team from the 1988 Winter Olympics is another example of the world getting behind an underdog.
According to one study, we get behind underdogs when we see an athlete or team who lack the same resources as the front runners.
We think it's unfair that the medal favorites have wealthy sponsors, generous government stipends, and access to the best coaches, while the underdog must work two jobs, borrow equipment, and are left to fend for themselves.
By supporting the underdog, it's a way to restore that sense of fairness we crave and try to see that justice is done.[11] We not only cheer underdogs, we often go a step further and see them as heroes.[12]
Now none of that is terribly surprising.
But psychologists also tell us that we humans are a fickle lot and our view changes if our underdog starts winning. When that happens, we're more likely to shift our loyalties to the athlete or team that used to be the top dog.[13]
Now let's assume that the competition is over and it's time for the medal ceremony.
I bet all athletes who make it to the Olympics have imagined what it would be like to have that gold medal draped around their neck.
In reality, only one person or team wins, and as the top three finishers stand on the podium during the medal ceremony, often their emotions are on display.
That's why TV cameras love to show close-ups of the winning athlete listening to their country's national anthem play.
One study found that all three medalists' faces can reveal a bias called the counterfactual thinking bias. This is when we think about what might have been and allow that thought to dictate our emotional response.
A team of researchers at Northwestern University evaluated photos of medalists' faces to study this bias.[14] The researchers looked at the facial expressions of Olympic medalists in the 1992 Summer Olympics in Barcelona. The gold medalists looked happy, which is easy to understand.
Bronze medalists also looked happy. The theory goes that they compared themselves to the fourth-place finisher and thought, "Hey, at least I got a medal."
But by and large, the silver medalists did not look happy. Researchers believe they probably compared themselves to the gold medalists and thought, "I almost won gold but didn't."
In other words, when they climb onto that medal stand, the benchmark that the bronze medalists are using to evaluate their performance is no medal at all.
The benchmark for the silver medalists is winning the gold medal. They didn't, and so, in their own mind, they underperformed.
This study was done in 1992, but there's at least some anecdotal evidence that some silver medalists remain an unhappy lot.
In 2018 at the World Junior Hockey Championships, a player for Sweden took his silver medal and tossed it in disgust to the crowd.
At the 2020 Winter Olympics in Pyeongchang, the Canadian women's hockey team lost to the U.S., and one of the team's players accepted her silver, but then refused to wear it.
When it comes to financial decision-making, there's a lot to take away from the medal study.
It all comes down to setting expectations and not letting our expectations get locked into a binary, "I made it" or "I didn't make it" type of thinking.
For example, let's say my goal is to retire with $1 million in my nest egg. What if I hit retirement, and I have $900,000. Is that the end of the world? Am I retirement failure because of that?
What if I wanted to retire at age 60, but upon running the numbers, it makes more financial sense for me to work until 62?
Did I fail? Not really. Life's unpredictable and in many ways uncontrollable. It's often better to be thankful for what we have, make the most of it, and not endlessly worry about we don't have.
I want to wrap this up by discussing one more aspect of all these decision-making biases, and that is whether we can learn our way out of them. Not surprisingly, I think we can.
I mean I completely agree that many of the cognitive and emotional decision-making biases we discuss on the show are deeply ingrained in all of us. But Schwab wouldn't do the show unless we thought that being made aware of them and providing some helpful tips to mitigate their impact wasn't helpful.
And here's some good news on that front. I started off this episode talking about the perils of hosting the games. The good news is that we weren't the only ones to notice this.
Potential host cities seem to have learned about the pitfalls of poor planning and needing to spend huge sums of money to defray unexpected costs and cleaning up gigantic financial messes.
The response has been that more and more candidate cities have taken a clearer-eyed view of the benefits and the risks, and fewer and fewer cities are even bidding to become hosts.
That forced the IOC to change the bidding process.[15],[16] Brisbane, which won right to host the 2032 Summer Games, is the first city selected under this new approach.
Although one could argue that the IOC was already thinking along these lines when they awarded the 2024 and 2028 Summer Games to Paris and Los Angeles, cities that both have many of the facilities already in place.
The new process focuses on sustainability and legacy, and the IOC will work with the city to help them design a plan that best fits their long-term social, sporting, environmental, and economic development plans.
All host cities must use as many existing and temporary venues as possible and build new ones only if there is a long-term, lasting need. Events can be located in more than one city, region, or even country.
By formulating these new requirements and processes, we can see that people and organizations can and do learn. Yes, progress is slow, but we do, collectively, slowly learn from our mistakes and those of others.
I hope you enjoyed our Olympics episode and will get even more out of the Paris Summer Games because of it.
And here's a fun fact: Another Schwab podcast, Choiceology, has an upcoming episode that features a participant in Paris. He's a kite surfer from Singapore named Max Maeder.
We hope he does well, and I hope you enjoy that episode when it comes out as much as I did looking at a sneak preview of the script.
If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe, M-A-R-K R-I-E-P-E. And if you like the show, a rating or review on Apple Podcasts would be much appreciated.
We always like new listeners, and if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.
For important disclosures, see the show notes and schwab.com/FinancialDecoder.
[1] "The Olympic Games of Paris," Olympics.com, https://olympics.com/en/paris-2024/the-games/olympic-paralympic-games/olympic-games
[2] Sloan, Jessica, "Advertising Around the 2024 Paris Olympics: Who Will Be Watching, and Why?" coxmedia.com, December 10, 2023, https://coxmedia.com/learning-hub/insights/advertising-around-the-2024-paris-olympics-who-will-be-watching-and-why/
[3] Flyvbjerg, Bent, Steward, Allison, "Olympic Proportions: Cost and Cost Overrun at the Olympics 1960–2012," Said Business School, University of Oxford, June 2012, https://www.carteinregola.it/wp-content/uploads/2015/09/Olympic-proportions-cost-and-cost-overrun-at-the-Olympics-1960-2012.pdf
[4]McBride, James and Manno, Melissa, "The Economics of Hosting the Olympic Games," Council on Foreign Relations, updated December 14, 2021, https://www.cfr.org/backgrounder/economics-hosting-olympic-games
[5]Glanzer, Murray, and Cunitz, Anita R., "Two Storage Mechanisms in Free Recall," Journal of Verbal Learning and Verbal Behavior, Vol. 5, issue 4, August 1966, pp. 351–360, sciencedirect.com, https://www.sciencedirect.com/science/article/abs/pii/S0022537166800440?via%3Dihub
[6] Page, Lionel and Page, Katie, "Last Shall Be First: A Field Study of Biases in Sequential Performance Evaluation on the Idol Series," Journal of Economic Behavior & Organization, Vol. 73, Issue 2, February 2010, pp. 186–198, https://www.sciencedirect.com/science/article/abs/pii/S016726810900211X?via%3Dihub
[7]Bruine de Bruin, Wandi, "Save the Last Dance II: Unwanted Serial Position Effects in Figure Skating Judgments," Acta Psychologica, Researchgate, December 2006, https://www.researchgate.net/publication/7235450_Save_the_last_dance_II_Unwanted_serial_position_effects_in_figure_skating_judgments
[8]Kramer, Robin, "Our Psychological Biases Mean Order Matter When We Judge Items in Sequence," theconversation.com, updated February 13, 2018, https://theconversation.com/our-psychological-biases-mean-order-matters-when-we-judge-items-in-sequence-70942
[9]Kramer, Robin S.S., "Sequential Effects in Olympic Synchronized Diving Scores," Royal Society Open Science, published January 1, 2017, https://royalsocietypublishing.org/doi/10.1098/rsos.160812
[10] "Derek Redmond on the Power of Perseverance: What Defines You in Life," Olympics.com, https://olympics.com/en/video/derek-redmond-on-the-power-of-perseverance-what-defines-you-in-life.
[11] Vandello, J.A., Goldschmied, N. & Richards, D.A.R. (2007). "The Appeal of the Underdog," Personality and Social Psychology Bulletin, 33, 1603–1616, https://www.researchgate.net/publication/5847045_The_Appeal_of_the_Underdog
[12] Vandello, Joseph et al., "Underdogs as Heroes: Handbook of Heroism and Heroic Leadership," bepress.com, 2017, https://works.bepress.com/scott_allison/44/
[13] O'Keeffe, Ciaran, "The Underdog Effect," The British Psychological Society, September 2, 2019, https://www.bps.org.uk/psychologist/underdog-effect
[14] Husted Medvec, Victoria, Madey, Scott F., and Gilovich, Thomas, "When Less Is More: Counterfactual Thinking and Satisfaction Among Olympic Medalists," https://www.scholars.northwestern.edu/en/publications/when-less-is-more-counterfactual-thinking-and-satisfaction-among-
[15] "Becoming an Olympic Games Host," Olympics.com, https://olympics.com/ioc/becoming-an-olympic-games-host
[16] "Frequently Asked Questions: Electing Olympic Hosts," Olympics.com, https://olympics.com/ioc/faq/electing-olympic-hosts/what-is-the-new-approach-to-electing-olympic-hosts
