How Sports Results Affect Our Decision Making

Most of us think that people make decisions, especially big, consequential decisions, based on a rational assessment of the consequences of that decision. The stock market is a great example. Clearly, it makes sense that who fares best in the stock market are those investors making logical, rational choices. Certainly with the types of investments that are made, the sophistication of the analytics that is undertaken and the vast sums of money involved you would want to think that that is the case, wouldn’t you?

 However, what we know is that isn’t the case. Recent research connecting losses in the World Cup and a corresponding drop in the stock market of the losing team’s home country would indicate otherwise.

Alex Edmans, from the London School of Business, looked at real-time data this past June during the 2014 World Cup in Brazil. He found that the stock market results were directly affected by the psychology and emotions of its participants. Furthermore, it was losing that affected the market, not winning. He saw negative impact on the stocks in both England and Spain in the day following their defeat in the tournament. His conclusions were that emotions affected the market over fundamentals.

The decline in markets following a loss is not limited to football (soccer), however. Edmans and his team looked at over 2,600 sporting games, from football to cricket to other sports matches and their influence on the stock market returns in 39 different countries. There was a larger influence in countries with a long tradition of football in their history, such as is true for England and Spain. In India, however, a loss in cricket had a profound influence on the market.

What I found interesting is that the opposite effect, the market rising when the home team won, was not true. It was only when they lost. World Cup eliminations resulted in an approximate 0.5% drop in markets the next day. It just goes to show how much we all hate to lose.

For example, when England’s soccer team gets knocked out of the World Cup the stock market goes down. Why? I think it’s because everyone is depressed.

How many times have you heard there is a “lack of confidence in the stock market” as the reasons for its decline? During the Great Recession of late, we heard this all the time. Consider the term “Consumer Confidence” that is prevalent in discussions about the markets and the economy. Last year, we published a blog that talked about how, despite evidence to the contrary, many consumers still had a lack of confidence in the economy. Even though it looked as though the economy was coming back, consumers were still reluctant to say they felt confident about the economy.

The key word here is “confidence.” Confidence is how someone feels about something. It is not a rational way of looking at life and yet it affects the rise and fall of the stock markets. Confidence is based on an emotional response, that may or may not have to do with rational decisions.

To feel confident, one must feel safe and secure. When you are looking at factual data that points to an obvious conclusion from the stock market (wouldn’t that be great?), you will feel confident that your decision is right. If you have a less obvious conclusion from your data (which seems to be the norm), you will rely on the facts you do have and how you feel about the decision.

What we can learn from the stock market correlation pointed out by Edmans is that feelings affect all of our decisions, even about where and when we invest in the stock market. When it comes to optimizing relationships with your customers, making them feel confident by giving them a positive outlook on the company and maintaining an excellent reputation will do much to promote this confidence. Give them all the factual data you can to help them feel safe and secure doing business with you.

People are not purely logical, not even about the stock market. Feelings affect everything consumers do, from where they shop to what they invest in for the future. Organizations that realize how important feelings are to their relationships with customers will do better to get the business of these consumers and keep them coming back for more. Consistency and quality are paramount to building up consumer confidence, in both your organization and your stock value.

And apparently in England and Spain, having a good run for the football team in the World Cup!