Action Men

The sport pages in India are full of the England Italy Euro football quarter finals which England in their inimitable style, lost on penalties. They are also full of "Pirlo's" magical penalty kick which so completely flummoxed the English goal keeper that he was left sprawling on his right hand side when the ball floated in at the center, exactly at the spot where he had stood moments before. This apparently turned the penalties Italy's way which the they were losing until then.

In any case, magical or not, trust statistics to turn something magical to the mundane. In his interesting book "Value Investing" James Montier highlights a study where experts studied the penalty shots taken and the goalkeepers reaction over an extended period of time. They found that strikers of penalties shoot to their left, right or at the center roughly equally that is 33% of the times. That means there is really no particular direction that they favor. The goalkeepers however tended to dive to their left or right roughly 94% of the time, hardly ever standing their ground. It was also found that even the times that they were right i.e. they dived to the correct side(only 33% chance of being correct) they could save only 33% of the shots. So roughly they would save 1/9 of the penalties if they dived. However when they stood the ground and the shot was hit at the center (remember 33% of the shots) they saved 66% of the time. That means they would save 2/9 of the penalties if they just stood the ground- an increase of 100% over the saves when they dived.

Therefore from the goalkeepers perspective it made complete sense to stand the ground. Surprisingly even from the strikers perspective (if he knew that goalkeepers tended to dive on either side 94% of the time) it made eminent sense to shoot at the center. When you look at it this way, you realise that Pirlo's shot was nothing magical.

The key question however, is why did the goalkeepers dive despite knowing that their chance of a save REDUCED by 50% just by diving? The answer apparently was in the human bias towards action. It was better to have done something and failed than to be seen to be doing nothing (standing their ground at the center) and failing. The coaches and bosses are likely to pardon somebody who is seen to be "trying" than somebody who did not even make an effort (standing the ground) even if not making the effort was actually the correct thing to do!

In all instances where a person is likely to be judged by the outcome than the process, there will be this incredible attraction for action over inaction even if inaction is the right thing to do. For eg. it is better for a Fund Manager to have invested in the Facebook IPO and lost 30% than to not invest and be questioned for inaction if by some crowd induced madness Facebook surged after the IPO.

In any case, I again suffered a loss yesterday in the madness induced by RBI expectations. I went long at 5192 which I squared off late in the day. Now I will sell short below 5030 or go long above 5202.