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….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.