TANC

TANC

Behavioural Finance: Lessons from Fantasy Football and Internet Poker

Steve Mills

13 September 2012


Important caveats

The views and opinions expressed in this presentation are mine alone and do not necessarily reflect the views of my current employer. Nor the views of my previous employers.

The poker hand examples in this presentation are very old. I’m much better at poker now. Really.

Agenda

What is behavioural finance?What is fantasy football?We all know what internet poker is, right?Examples


What is behavioural finance?

“Behavioural finance can be described as the application of psychology to financial behaviour or, at a general level, the study of human fallibility in competitive markets.”

Ian Sykes

“The radical insight of behavioural finance is that people are human”

Werner De Bondt


What is fantasy football?

You compete at an auction to build a squad of players

They score points depending on what the players do in real life

Whoever gets the most points wins


Fantasy football point scoring

For all players in the team• Scoring a goal 3 pts• Assist 2 pts

For the defenders and goalkeeper• Clean sheet 3 pts• One goal conceded 0 pts• >1 goal conceded -(goals-1) pts


Talk a Good Game Premier LeagueRoll of Honour

1996-97 Steve Mills

1997-98 Guy Maule

1997-98 Peter Richardson

1998-99 John Millett

1999-2000 Paul & Chloe Yates

2000-01 Steve Mills

2001-02 Kim & Caroline Milford

2002-03 Dr. Michael Ortmann

2003-04 Dave Hicks

2004-05 Connor Dempsey

2005-06 Steve Mills



Talk a Good Game Premier LeagueRoll of Honour

1996-97 Steve Mills

1997-98 Guy Maule

1997-98 Peter Richardson

1998-99 John Millett

1999-2000 Paul & Chloe Yates

2000-01 Steve Mills

2001-02 Kim & Caroline Milford

2002-03 Dr. Michael Ortmann

2003-04 Dave Hicks


2005-06 Steve Mills



We all know what internet poker is, right?

No limit Texas holdem

Cards

Hand ranking

Betting


Fantasy Football Season: Phase 1


Fantasy Football: Tips from the experts (1)

You’re better off sticking with what you know: established

Premiership players.

Who is this Andy Johnson anyway?


Behavioural finance experts say you’re guilty of

Home Bias


In life insurance

Policyholders reluctant to invest in overseas equities

Life companies slow to start using derivatives



For a good indication of what a player’s worth, keep an eye on the real world transfer market.

What’s that? David Batty? I’ll bid £4million

You’re laughing, but have you seen Steve

play poker?


You and me baby – we’re in

this ‘til the end



Anchoring &

Adjustment


In life insurance

How many actuaries does it take to change a light bulb?

“How does the cost of the swaptions compare to our realistic GAO liability?”

Policyholders choosing risk level or premium in middle of range

Slow reaction to change, eg low inflation environment



We’ve put in £20m for Henry and £20m for Van Nistelrooy. It worked last season, so we

thought we’d do it again.

I wouldn’t have been able to live with myself if we lost our crown as a result of tinkering

with a winning strategy.

You’re laughing, but have you seen

jwj1967 play poker?


2 queens


Someone needs to keep this

guy honest



Regret Aversion


In life insurance

“What if we hedge our GAOs and interest rates go back up? Then we’d make a loss and I’d get the blame.”

“Let’s not move the with profit fund out of equities just yet – if equities go back up we’ll lose out and I’ll get the blame.”



Chelsea keep loads of clean sheets. Every time Robert

Huth plays he’ll be picking up points.


play poker?


I’ve got top pair and the open

ended straight draw and this idiot’s walking straight into it!



Optimism


In life insurance

“Equities always outperform bonds”

“We should allow for it somehow in our embedded value….”

“…or valuation of our pension scheme”



Shall I ditch Heskey and make a move for Harewood? Nah – I spent £10m on him and don’t

want to make a loss.

It’s smart thinking like that that makes me he great poker

player that I am


I’ve invested too

much to back out

now



Mental Accounting


In life insurance

Our fund managers want to temporarily shift the overseas fund out of the US and into Japan

They’re going to do this using derivatives

Let’s monitor the profit/loss on the derivatives – it will tell us whether use of derivatives is a good thing



I’m holding on to Jonathan Stead thank you very much. 20 games and no goals – that

means he’s got 18 more games in which to score his expected

10 goals for the season.

Why would I get rid of him just before the upturn?


play poker?


**** ****ing **** ******


And then,on the very

next hand……



Gambler’s Fallacy


In life insurance

“Why are we moving out of equities when they go down?”

“They’re bound to go up again, in which case we’re selling them when they’re cheap and buying when expensive.”



Yes I’ll have a naan over here. And shall we order some sag

aloo?

An Indian’s not an Indian without ordering too much

food.



Groupthink


In life insurance

“So, what are other companies doing about this?”

This could be- Selling pensions properly- Moving WP fund out of equities- Hedging guarantees- Writing cheap annuities- ….



There’s no luck in it. It’s just down to my talent and to

German supremacy.The league table never lies.

etcetc

Just watch me go next season.

You’re laughing, but have you ever talked

to Steve about poker?


I knew you were

bluffing all

along



Hindsight Bias


In life insurance

“GAOs never cost us anything for years – we knew when we wrote them that they would never go into the money”

“You’ve made us do all this work to zeroise negative reserves and it’s made no difference – we were right all along to ignore the possibility of negative reserves”

“I knew when I decided not to hedge that the market would go in that direction”



If it wasn’t for that Shearer injury I’d have won this season.

Just like I did last year when I correctly forecast that ….

Steve will back me up


That counts as a win in my career

records



Self-Serving Bias


In life insurance

“Our UK equity fund was top of its sector over the period October-December 2004”

“ABC life’s terminal bonuses on 25-year policies are currently x% - shall I bring you over a proposal form tonight?”

“If you bought into our fixed interest unit trust last week, you’d have had an expected return of 6% pa – now only one week later, that’s gone up to 7%”


And finallyHow many of the behavioural finance traits described today can you find in this press article from 2006?

“Bonuses on most endowment policies will be lower in future. The reason is companies were instructed or advised to sell equities near to the bottom and buy gilts at inflated prices. This was the safety first option to avoid any risk of becoming the next Equitable Life.”


“Over the long term, it is axiomatic in investment that higher returns are expected from riskier investments and lower returns where capital risk is low. As the actuaries note, yields on gilts are at their lowest since the 1950s, so bonuses will stay low unless a fund “has exposure to riskier investments such as company shares, and the riskier investments do well”. But if long term interest rates rise, “risk-free” returns will look horrible.”


“What made them do it? Mainly actuaries, reacting to yesterday’s problems, along with the FSA, which boneheadedly obliged insurers to sell shares at the start of their recovery.”

!


And finally….Where to find out more

Applications of Behavioural Finance – Ian Sykes• Institute Website

Making Actuaries Less Human – Nigel Taylor• SIAS Website


Thank you to….

Fantasy League Professional• pro.fantasyleague.com

Pacific Poker• www.888.com

Akash Tandoori

•Chatham High Street

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