It hath been decreed that the biggest football tournaments must be accompanied by a psychic animal – be it octopus, fish or pig. Someone really ought to start to blog about football and behavioural economics, because this popular sport of kicking balls across fields throws up case-study after case-study: Ronaldo’s magic wrist-bands, over-optimism fuelled an inability to learn from past performance (in the case of England fans), and a desperate wish to believe in ESP. I can’t imagine what explains this link.
It is timely that economists Nattavudh Powdthavee (London School of Economics) and Yohanes Riyanto (Nanyang Technological University) have published a new discussion paper outlining the results of their experiment to see whether people would pay for useless advice that apparently predicted the results of a fair coin flip.
This is how it worked: people had to place bets on the outcomes of five coin flips: heads or tails each time. Each participant was also given five envelopes containing a “prediction” – they could look inside the envelopes before making a bet, but it would cost them some money. After the first coin flip, everyone got the chance to look in their envelope for free. The experimenters found that when the “prediction” in the first envelope was correct, people were more likely to buy a prediction to help them bet on the subsequent rounds – even though it was a fair coin toss. And the more predictions turned out to be right, the more likely people were to buy a prediction in following rounds. Could people have been doing it for fun? It would seem that some, at least, were taking the predictions pretty seriously – people who bought predictions in the last few rounds were more confident in their bets. They placed bets around 30-40% higher than non-buyers.
There could be some cultural factors at play here: the research was conducted with students in Thailand and Singapore – and Thai students tended to be more susceptible to these effects. But, remember this is a fair coin toss, with people well-educated enough to get into university.
Imagine how much harder it would be to know whether it is worth paying a fund manager for financial advice. A fund manager might have a bit more expertise, but many studies suggest that they don’t perform much better than random guesses. Similarly in sports, it’s extremely difficult to tell whether it’s reasonable to think that a pig might have some interesting insights into who is going to win.
The full paper, “Why do people pay for useless advice?” is available here.