The Vegas Golden Knights face off the Washington Capitals in the NHL Stanley Cup Finals this week. If you have ever watched any hockey, you may have seen the goalie leave the goal towards the end of the game if his team is losing.
Have you ever wondered if and when it ever makes sense for a hockey coach to pull the goalie?
Pulling the Goalie
Pulling the goalie is one of the more dramatic moves in hockey, traditionally credited to coach Art Ross in a 1931 playoff game between his Boston Bruins and the Montreal Canadiens. Down 0-1 with a minute to play, he sent goaltender Tiny Thompson to the bench and inserted a sixth attacker. It didn’t work, there was no more scoring and Boston lost. But a tradition was born.
Actually, two traditions were born, one good, one not so much. Pulling the goalie is a sound strategic move, but waiting until there is one minute left to play is not. Only recently have hockey coaches begun to pull goalies earlier, and according to AQR Capital Management, it’s still nowhere near early enough.
AQR Capital Management
AQR Capital Management (AQR) is an investment firm that built a simple, but powerful and intuitive, model for when a hockey coach should pull the goalie when trailing. When the model reports that the coaches aren’t doing it nearly early enough, they ask themselves why, and provide some key lessons for portfolio and risk management, and business in general.
Investors have been shown to be reluctant to sell their losers (part of the so-called “disposition effect”) presumably as selling is psychologically “locking in” a loss. Loss Aversion Video
Might the extreme reluctance towards pulling the goalie, when say down two with more than ten minutes left, be the result of a similar cause? Suboptimal strategies in sports may not cause permanent harm, but suboptimal investing strategies can be a serious problem with long-term consequences.
Intelligent Investing believes in behavioral coaching and behavioral finance to help mitigate these potential suboptimal investor behaviors.
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This blog contains excerpts from Pulling the Goalie: Hockey and Investment Implications (March 1, 2018)
Asness, Clifford S. and Brown, Aaron, Pulling the Goalie: Hockey and Investment Implications (March 1, 2018).