On Second Thought, You Should Invest Like Pete Carroll

Like everyone else last Sunday, I was screaming like an orangutan on amphetamines at the t.v., “How could you not unleash the beast from the one yard line??” Pete Carroll instantly transformed himself into the “stupid” Rob Lowe from those cheesy commercials! After some reflection, I have changed my mind. Investors can learn a great deal from Carroll’s decision process, and even more about their own behavioral bias from that fateful play. Full disclosure: I am a Giants fan (they were eliminated from the playoffs during the World Series)!

The narrative that Marshawn Lynch should have got the ball at that moment can be factually disputed for three reasons:

1. The Patriots were in a goal line defense – New England had sent in their best goal line defense with only three pass defenders on the field. The NFL is a game of matchups and the Seahawks had the advantage by passing on this play. While it would be valid criticism to ask why the pass was attempted in the clogged middle of the field instead of on the outside, the choice of a pass play based on the matchups was valid.

2. Marshawn Lynch is not great from the one yard line – Five times over the past year, the Seahawks found themselves on the one yard line and handed off to Beast Mode. According to ESPN stats, the result was 80% of the time he was stopped. This is not to say he wouldn’t have made it this time, but the narrative of a sure touchdown was not backed up by data that was compiled during the season.

3. The Seahawks did not have enough time to run three plays – With about 30 seconds left on the clock, the Seahawks knew they would probably have to try one pass play even though they had one time out remaining. Why not attempt this when the match up was in their favor?

Process is the key to investing success. Good process will sometimes lead to bad outcomes as we saw in Arizona. That does not mean the decision was wrong. The probability of success was higher for a pass than a run in this case. It did not work because of the type of pass that was called and extraordinary preparedness of the New England defense. Last year, many investors had globally-diversified low-cost portfolios and were trounced by the S&P 500 (which had returns skewed by the outperformance of few large components). Though the portfolio-creation process was correct, the outcome was less than optimal. Luckily for most of these managers they did not have 115 million inebriated clients micro- managing their very move like poor Pete Carroll. (By the way, hedge fund managers make a lot more money than Mr. Carroll and have had much greater underperformance.)

The criticisms of Carroll exposed many cognitive errors that investors make (including myself):
1. The need for a narrative – People prefer stories to data. Instead of analyzing the complicated data inputs of NFL play calling, the simple story that Carroll was a buffoon became the default explanation. A single variable explanation for a football game that has numerous uncontrollable components (like the markets) is often incorrect.

2. Recency Effect – Pete Carroll and his offensive coordinator, Darrell Bevell, are now being crucified because of their most recent actions. The fact that Carroll has won both a College and NFL championship in his past became a moot point. What have you done for me lately? This is similar mantra heard from those that say diversification does not work anymore after last year’s disappointing results. This short-term judgment is not fair and rarely ends well.

3. Metacognition – The less competent people are, the more confident they are in their abilities. NFL coaches work 100 hours a week and cover many possible contingencies that could arise in a game. They are data hogs who have statistics on how many times their opponents wipe their butts each day. It is amazing that people who could not even read a playbook are so certain in their ability to out coach the coach. Watching a game while shoveling Doritos into your mouth (while simultaneously taking selfies) does not exactly qualify somebody to be the next Vince Lombardi. This is not much different from market participants who feel they can “beat the market” and outgun high-frequency traders from their living room.

4. Confirmation Bias – Often people will only seek out opinions that confirm to their existing thoughts. The pile-on Pete Carroll was a Confirmation Bias Storm of the Century. Like investing, what feels good often is usually not the correct decision. No one was in the mood to hear or listen to the other side of the story. Especially the deranged Seattle Fan who put his head through his own t.v. at the conclusion of the game. Full Disclosure: I was jumping up and down at the top of the pile with chicken wings falling out of my mouth!

In conclusion, investment results need to be reassessed constantly, after emotion can be taken out of the equation. Sometimes the results may be unpleasant, yet they come second to the process that was used. While this is no consolation to Seattle fans, Pete Carroll may have made the right decision. Process wins games and makes investors money. Pete Carroll used a sound process. It just did not work out the way he envisioned.