A Return to Emotional Hedging?

January 29, 2018 Chatham Financial

Philadelphia City Skyline

We Philadelphia sports fans are a long-suffering lot. Our Flyers last won the NHL title in 1975, so long ago that it was the last Stanley Cup-winning team composed entirely of Canadians. Our 76ers last won the NBA championship in 1983, so long ago that it was the last NBA finals that finished before June, back before the playoffs started taking as long as the regular season and including almost as many teams. Our Phillies won the World Series in 2008, but due to the franchise’s long history – no American professional sports team has stayed so long in one city with one name – they’ve lost more games than any team in the history of American professional sports.

But our beloved Philadelphia Eagles, despite a couple of Super Bowl appearances, have never hoisted the Lombardi Trophy at all – perhaps the pent-up angst grinding us up inside led NFL players in a 2015 Sports Illustrated to name us the most intimidating fans in the league. As a direct result of our championship drought, we wait with unusually bated breath for this Sunday’s matchup between the Eagles and perennial powerhouse New England Patriots, our shot at the purest euphoria known to a sports fan, or more abject misery.

As the Eagles made their last run to the Super Bowl back in 2005, in order to avoid the full measure of that misery, some local fans resorted to the practice known as emotional hedging. Put simply, emotional hedging is the practice of betting against one’s preferred team to reap a financial benefit should they lose. We have a certain friend who faithfully bet against the Eagles in the divisional round and the conference championship; he lost financially but experienced jubilation as the Eagles comfortably won both of those games. However, when the Super Bowl came around, he stopped hedging – so when the Eagles lost by a field goal, he faced the agony of defeat with no countervailing financial payout.

Betting against one’s sports team could theoretically satisfy the behavioral economist in many. After all, as Boston University business professor Casey Morewedge notes, “Logic strongly recommends this kind of emotional hedge. Consider that for most people, losing something hurts more than gaining that same thing feels good — a phenomenon known as loss aversion.” And betting that your side will lose helps minimize your potential losses rather than maximize your potential gains.

So why don’t more fans take advantage of emotional hedging (aside from those with moral convictions against gambling or residing in jurisdictions where it violates applicable law)? The explanation, according to Morewedge, Simone Tang, and Richard Larrick (both of Duke’s Fuqua School of Business), is that the reluctance to hedge emotionally often stems from identity signaling. Most sports fans across leagues cannot bring themselves to bet against their favorite team – the personal dissonance associated with feeling disloyal outweighs the monetary reward associated with hedging. In one example, 45% of NCAA fans turned down a free $5 bet against their team, exhibiting both anomalous risk-preferring behavior and rejecting a strategy that strictly dominated another. In another case, students faced with equal expected value payoffs (based on their own probability beliefs) about the 2000 presidential election bet on their preferred candidate 74% of the time, even though they could have emotionally hedged the election and avoided the worst downside outcome.

It turns out that when the stakes don’t relate to one’s personal allegiances and loyalties, like being offered hedges on sporting events without one’s preferred teams, people comprehend the value of hedges and utilize them. But no reasonable amount of money will prompt some football fans to “profit” from their beloved team’s loss. Hedging against one’s national currency’s or sovereign bonds’ decline does not seem disloyal, but hedging against the Patriots putting up 30 points on the Eagles would create an intractable dilemma of personal loyalties!  

Whether you have questions about financial or emotional hedging, we’d love to hear from you. And enjoy the big game! 

 

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