THE RECENCY EFFECT, GAMBLING & THE SUPER BOWL…

I was driving all day long yesterday and heard an interesting statistic on the radio.  The last 14 coin flips in the Super Bowl have been won by the NFC.  The odds of this happening are 16,000:1.  Beyond a statistical anomaly.  Anyhow, the commentator, a Vegas bookie, was discussing a bet they had going in which they wager on the coin flip every year.  He was talking about how silly the bet is because, obviously, the odds are 50% heads or tails.  But Vegas is playing it NFC vs AFC and guess what?  75% of the public is betting on the NFC to win the coin flip!

Clearly, this is a case of the recency effect taking hold of sentiment and influencing the betting psychology.  The same thing happens in the stock market on a daily basis.  We have a tendency to focus only on the short-term and what has happened in the last few days, weeks or months.   The NFC might win the coin flip on Sunday, but it won’t have anything to do with the past coin flips.   And history proves this as 22 of the total 45 Super Bowls have had a tails flipped (very near the expected 50% probability of a coin flip).  Vegas is taking advantage of the recency effect in establishing a silly, but profitable bet.  Vegas loves the Super Bowl.  And the market loves for you to focus on the recent past.  After all, it’s one of the primary pitfalls the average investor can’t seem to avoid getting caught in….

As for me, well, I am a Redskins fan, so when it comes to American football, I always lose….

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Octavio Richetta

    Even though sports fans derive great pleasure from sports, they don’t have a very happy life. Even the top teams loose close to 50%of the games (your coin flip), they are just better at winning the right games.

  • Octavio Richetta

    CR, do you have any stats on the relevance of a rally built on low volume such as the current one?

  • Mercator

    I’ve posed this question before. I’m not aware of anyone out there willing to tackle it. I think old rules are significant, until they’re not. And when they reemerge, they’re important again. My view is that it points to how frail industry experts are relative to their own profession. Hardly something they want to focus on, especially as it relates to their revenue stream.

  • http://pragcap Michael Schofield

    Investors Business Daily does quite a bit with volume. I haven’t had a subscription in a few years but at the time they were having to make adjustments. They probably won’t offer much in the way of stats but will have advice on how to use volume assuming it can even be done. I’ve given up on it. Support and resistance lines have been working very well for me but there is almost always a 2 or 3% pullback below the line right before a big move. That makes buypoints and stops hard to set. A lot of games out there designed to cost you money but you already know that. All in all a very unique market.

  • pebird

    A subtle example of composition fallacy. The probability of 16 straight heads is the same as the probability of any other sequence of 16 flips, including: H T H T H T H T H T H T H T H T

    No wonder the public can’t grasp MMT.

    Hoping for a 0-0 tie and wonder how Madonna is going to perform.

  • http://www.pragcap.com Cullen Roche

    OR,

    I tend to ignore volume. It’s an entirely unreliable metric except in helping find bottoms at some points. If you recall 2009 rally you’ll remember that it was almost entirely on low volume….Price is price. You can’t say that a slow market like real estate is necessarily less reliable than a market like the equity markets. In fact, often times, the slower low volume market can be MORE reliable for various other reasons….Bad example, but I hope you get where I am coming from. Have a nice weekend everyone.

  • Octavio Richetta

    U R 1000% RITE. Short term, MR. Market is always right, as WB says a voting machine in the short term..

    This is a grat link on the arrogance of those that don’t respect the market:

    http://www.thereformedbroker.com/2012/02/02/no-one-is-ever-wrong-anymore/

  • Octavio Richetta

    From my response to cr above this one is a must read:

    http://www.thereformedbroker.com/2012/02/02/no-one-is-ever-wrong-anymore/

  • Anonymous

    What are the odds these 75% of people are betting on? If the bet on NFC has an expected value of 0, then sure, why not bet on them just for fun? If, however, people are paying a premium for NFC and therefore making negative EV bets, then that’s ridiculous!

  • Kman

    REDSKINS?!!!… Really?… (Stunned Silence)

  • Erik

    “American football”??? Must you really pay homage to soccer fans…

  • Wulfram

    Clearly by distinguishing between American Football and “football”, Cullen is inadvertently showing his red socialist, left leaning liberal roots. I always knew he wasn’t a real capitalist. :P

    Never mind his criticism of the ECB and European cessation of monetary sovereignty.

  • http://www.pragcap.com Cullen Roche

    Lots of international readers….

  • JWG

    The most pervasive fallacy in society is the post hoc propter ergo hoc fallacy. Confusing correlation with causation is a mistake even the well educated make constantly. Recency bias sucks in the retail investor at or near market tops but it isn’t as pervasive.

  • tyoung

    I would argue that the odds are really only 1 in 8000 because the first one doesn’t count. We have had 13 flips that have come up the same as the first flip. That’s one in 8000.

  • T

    as a skins fan myself, i feel your pain

  • http://www.pragcap.com Cullen Roche

    Who else beat the Giants twice this year? It’s the little things that count. That’s what I tell myself in a weak attempt to forget how bad things are….

  • http://livinginvol.com/ Slim

    I stay away from sports gambling but I’m always interested in how Vegas operates… I wonder if the bookies adjusted the line on this prop bet after receiving a lot of action on one side (NFC to win). Because this is what they usually do, just like any legit market maker, they adjust their theoretical price as they receive a lot of action on one side or the other and hope to have even action on both sides and capture a spread for themselves. Anyone know if they offered odds that would imply a biased coin flip scenario?