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From Pro to Am: Loss Aversion’s Impact on Your Golf Score

June 16, 2015

With the U.S. Open on the horizon, we thought we’d take a look at something you likely have in common with professional golfers, aside from the occasional duck hook.

As you likely know, golf is scored by adding up the number of shots taken on each hole with the intent being to navigate the course in the fewest number of shots. Simple math tells us that no shot is worth more than another, and in a perfectly efficient world, we would expect golfers to value comparable putts the same way regardless of what score it was for. Put another way, there is just as much value to a golfer making a putt for a three as there is for making the same putt for a ten. The value associated with the made putt is completing the hole in the fewest number of possible shots at that moment which happens to be one. Similarly, there is just as much value accompanying a golfer’s missed putt for a three as there is for the same missed putt for a ten. The value associated with these missed putts is also one, the number of shots the golfer must add to their score. And, since the last time we checked one equals one, a perfectly efficient golfer would approach the same putt the same way, independent of the score.

 

Par isn’t everything

Now, if you’re saying to yourself that this is not at all how I approach putts, you’re like the vast majority of us. Most of the golfing population considers the hole’s par when attempting a putt, which is likely to our detriment. Even at the highest levels of play, where we would expect this effect to be marginal, this becomes evident.

Under the assumption of a perfectly efficient approach, we would expect the success rate for putts to be roughly equal. However, researchers found statistically significant evidence PGA Tour professionals make birdie putts at a lesser rate than comparable ones for par. In fact, in their analysis of over 2.5 million putts, the authors estimated their rate of success was 3.6 percentage points lower on birdie putts than comparable ones for par, potentially equating to losses of hundreds of thousands dollars in earnings.

 

Enter loss aversion

So why do we do this? The short answer is we tend to value gains and losses of the same magnitude differently, a phenomenon known as loss aversion. In the instance of golf, the value of a missed/lost putt is perceived to be significantly greater than the value associated with a putt made/gained. We are essentially willing to forgo the chance of “gaining” a shot, using par as a reference point, in favor of avoiding the “loss” of one.

 

Loss aversion beyond the links

The notion we disproportionately value gains and losses is not exclusive to the golf course. To illustrate this, we’ll utilize an experiment published in Science. First, participants were presented with the scenario of being given $50 and having to choose between two options:

  1. Keep $30.
  2. Gamble and have a 50% chance of keeping or losing the whole $50.

As our math-savvy readers have already determined, the expected outcome for option 1 is superior. You are guaranteed to keep $30, compared with the expected outcome for option 2 of keeping $25 dollars.

$25 = (50% x $0) + (50% x $50)

The majority of respondents chose accordingly: 57% said they would keep $30 and 43% said they would gamble. Participants were then given a new set of options:

  1. Lose $20.
  2. Gamble and have a 50% chance of keeping or losing the whole $50.

Mathematically, the expected outcomes are the same. Option 1 leads to a gain of $30 and option 2 an expected gain of $25. The situation was only framed differently so similar results would be expected. As you may have come to guess by now, this was not the case: 38% said they would lose $20 and 62% said they would gamble. That means that framing option 1 as a loss coincided with a 19 percentage point increase in the number of people avoiding that choice. Other studies have estimated that the average person values a loss up to 2.5 times as much as a gain of equal magnitude.

 

So how does this apply to marketing?

As it turns out, our aversion to loss can also be appealed to in marketing. For example, the use of a product may be associated with a gain of $500 and positioned in two ways:

  1. If you use our product, you could save up to $500 a month.
  2. If you do not use our product, you could lose up to $500 a month.

Option 1 intuitively appeals to our affinity for savings and option 2 does so for our aversion to loss. Regardless, they are effectively saying the same thing. Loss aversion also comes into play when we are deciding whether or not to purchase extended warranties and a host of other money choices. Luckily, there are also ways that you can put your aversion to loss to good use. So, next time you’re out golfing or choosing between two value propositions, take a moment to think about how you are evaluating them.

 

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