Loss Aversion on the Links: Penalized Pro Golfers Fall Prey to Decision Bias

1. Introduction

Loss averse economic agents want to avoid outcomes in which they fall short of a reference level of utility that was preconceived prior to the embarking of an endeavor. This assumption, first famously discussed in Kahneman and Tversky (1979) and later in Thaler (1980), forms the basis of this paper, which sets out to study the strategic decisions of professional golfers who have or have not been forced to accept a penalty from violating a rule at the beginning of a hole. By exploiting the US Golf Association’s Rules of Golf and controlling for a host of characteristics about the shots golfers face, it is possible to determine the extent to which their strategies diverge in a matter that is consistent with loss aversion. Indeed, the evidence presented below suggests that penalized golfers- who are facing a loss on the hole relative to their predetermined reference score- are more likely to take on risky strategies compared to their non-penalized opponents. This difference in behavior is explained by loss aversion, which is interesting because the finding runs counter to classical economic theory and golfing orthodoxy, both of which posit that both sets of golfers would behave similarly, despite their different previous experiences on a hole.

This article is valuable because it adds to a somewhat thin literature in which well-seasoned professionals exhibit tendencies consistent with the predictions of prospect theory. Indeed, Pope and Schweitzer (2011), which also studies professional golfers’ behavior, mention a main thread of criticism of behavioral economics is that many applied findings that support a part of prospect theory have occurred in the laboratory but not the real world.¹ Perhaps the most famous of both types of findings is the applied behavioral studies on the equity premium puzzle, which was first discussed in Mehra and Prescott (1985). Benartzi and Thaler (1995) suggested that myopic loss aversion might explain the existence of the puzzle, and Thaler et al (1997) and Gneezy, Kapteyn, and Potters (2003) found in a laboratory setting subjects behaving in way consistent with myopic loss aversion. Haigh and List (2005), though, uses highly trained financial professionals (rather than college students) in an experimental setting and finds these experienced and knowledgeable workers engage in behavior consistent with prospect theory. Like Pope and Schweitzer (2011), this paper uses data from non-laboratory competitions that involve the best golfers in the world and finds they are not immune from making economically inefficient decisions in a manner that is consistent with loss aversion.

Because differences in golfers’ decision-making are driven by differences in immediate experiences they had, they are exhibiting behavior that is consistent with the sunk cost fallacy. Relatively few studies show seasoned professionals making this error. Staw and Hoang (1995) claims to show that professional basketball teams are less willing to part with their higher-rated draft picks compared to their lower-rated prospects. However, Camerer and Weber (1999) and Leeds, Leeds, and Motomura (2015) both dispute the conclusion of that study. Social psychology experiments performed in laboratory settings has had much to say about humans’ inability to let go of the past. Notably Arkes, Dawes, and Christensen (1986) and Arkes and Ayton (1999) discuss the role sunk costs and reference points play in keeping humans from making rational choices. Finally, Holcomb and Evans (1987) used laboratory experiments to show the impact sunk costs had on subjects’ decision making. Given that golfing orthodoxy mandates that a golfer look forward and not to the past when making a decision to minimize the score he takes on the hole, the findings in this paper are doubly interesting because the best golfers in history have recognized and fought to avoid committing this tactical sin.