Costa benefit analysis - What can the 2014 World Cup tell us about behavioural finance?
As we reach the business end of the 2014 World Cup, with all four quarter-finals taking place over the next couple of days, the obvious question has to be: what useful value-oriented lessons might we learn from the tournament? And the equally obvious answer has to be: none – or at least none yet, because useful value lessons tend to take a good deal longer than a fortnight to become fully formed.
But useful value-oriented illustrations? Well, that is a different matter and really we do not have to look any further than the contrasting fortunes of Costa Rica and Spain over the last few weeks. Now, we are not about to boast that The Value Perspective had a small piece of the 50-to-1 odds you could have found before the tournament against Costa Rica finishing top of their group.
Nor, tempting as it might be, will we try and manufacture any value significance out of the way a team of cheap (at least in football terms) but well-managed unknowns was able to see off the challenge of three former World Cup winners – England, Italy and Uruguay – which boasted much more expensive players and which were clearly unable to make the best use of the far greater resources at their disposal.
No, what the experiences of Costa Rica and Spain neatly illustrate is the behavioural finance concept that is the availability heuristic. also known as ‘recency bias’, this is the idea that humans tend to ascribe greater significance to more recent events – for example, a driver slowing their driving down after being surprised by a speed camera only for their speeds to creep up again over the following weeks as the acuity of the memory fades.
Thus, asked to choose which of the pair would progress further in this world cup, it seems unlikely very many people – at least from outside the 4.8m Costa Rican population – would not have plumped for Spain. After all, they had won not only the 2010 tournament but also the last two European championships while Costa Rica were at the time ranked just the 34th best team in the world.
On the other hand, the mighty Spanish team did have a number of players coming towards the end of their illustrious careers and – at the risk of being accused of recency bias ourselves – you only have to look back to the last world cup to find an example of the then holders (Italy) failing to make it past the group stage.
Meanwhile, a ranking of 34th out of a total 209 official international sides in the world – let alone the fact of their actually qualifying for this tournament – would have suggested Costa Rica knew a thing or two about playing football. They had a chance – a chance that almost nobody on the planet was willing to give them.
An even more pronounced example of the availability heuristic also involved Spain as Holland went from being seen as a middling chance to serious contender in the time it took to thrash the defending champions 5-1 in the third game of the tournament. Yet, give or take a substitute or two, it was the same teams that left the pitch as had walked onto it 90 minutes earlier.
Times change; nothing – not even Spanish midfield legend Xavi’s stamina – goes on for ever; and the future is not set in stone. However, happy as we are to look past the Dutchmen’s gripping but unconvincing second round showing against Mexico, even we will probably still pass on the 7 to 1 against Costa Rica staging another upset against Holland on Saturday evening.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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