“If we compared average rainfall in the month preceding and the month following the performance of the Hopi rain dance, we would find more rain in the period after. The dance is not performed unless there is a drought(…). Nevertheless, this ’slump-ending’ effect may help to account for the tenacity of belief in the effectiveness of the ritual”
“Fire Terry Collins!”. The calls are flooding into local radio stations. Fans are irate with the performance of the New York Mets, and their solution (like many before them) is to fire the manager. The team needs to “shake things up” or “send a message”, however does firing the manager have any significant effect on a team’s performance? The answer is a pretty resounding, not really.
An excellent paper by John Charles Bradbury of Kennesaw State University looks at numerous studies focused on the performance impact of manager changes. These studies considered data from 1982 through 2013 in several different sports (soccer, baseball, basketball, hockey, football). The results show that, while firing the manager may be a worthwhile PR move, its effect on actual performance is minimal.
Another paper by Sandra Maximiano of Purdue University found that firing soccer coaches did seem to have a positive effect in the short term. However, upon looking at results of similar struggling teams who did not fire their coach, the two sets of data were indistinguishable from one another. This hints that good, old-fashioned mean reversion may explain most of any performance bump seen by coaching changes.
So why do fans constantly ask for a manager’s head when performance is poor? Well for starters, the old saying goes, “You can’t fire the players”. It’s also about illusion of control. We like to believe that we have control over circumstances that are largely random, like the outcome of a few baseball games or short-term market performance.
If a baseball team going through a rough patch marginally improves after the coach is fired, it was a shrewd decision. If the same team continues struggling, it was bad luck. If short-term investment performance improves after a strategy change, we’re geniuses. If it doesn’t, we were simply unlucky. The illusion of control allows us to believe that we’re in charge of things we really aren’t.
What are fans telling us when they express a desire to move on from their current coach? I think it’s mainly just a display of frustration, which may be warranted. They want a scapegoat for the poor performance. Most coaches who get fired mid-season are leading teams that have underperformed lofty expectations (see the 2016 New York Mets). However, according to the data, it seems irrational at best to think firing the manager will have any significant effect on the team’s remaining games. But the grass always seems greener, doesn’t it? If we aren’t going to resist this irrational urge as sports fans, we should make better efforts when investing.
I think investors probably feel a lot like angry sports fans when their strategy underperforms. Whether it be global diversification, tactical, momentum, value, or anything else, periods of underperformance are par for the course. The worst thing an investor can do is strategy hop every time things get uncomfortable. Using recent underperformance as a scapegoat to rationalize a decision to pick the metaphorical investment strategy scab is taking the easy way out. As investors we must do what is right, and not always easy, if we want to succeed. If your investment strategy is based upon strong evidence (I hope it is!), you need to hang in there. The point when you begin to question your strategy the most is probably one of the worst times to give up on it. The grass may look greener, but you’re probably better off sticking with the plan your investments were formulated on in the first place.