Recency bias, small sample size and the odds of the Oilers winning the Stanley Cup

Why do I mention the Stanley Cup in an investment column? Firstly, it’s been a long time since the Cup was in Canada. The last Canadian team to win it was the 1993 Montreal Canadiens and prior to that the Edmonton Oilers in 1990 – and I’m a huge hockey (Toronto Maple Leafs) fan.

Secondly, making investment decisions is largely about making a bet – not unlike betting on who might win the game tonight. What are the odds of a winning investment? We have spent the better part of 25 years on BNN Bloomberg educating Canadians about how to make better investment decisions.

Making an investment is rooted in probabilities – it’s just math (and a significant degree of emotions we are not always aware of). In investing, there are the qualitative (soft-side story) and quantitative (statistics) aspects of making the decision. Having elements of both are important.

The qualitative side tends to be more emotional while the quantitative side is more fact based. I’m (very likely) going to win the BNN Bloomberg staff hockey pool this year (I won a few times over the years, so clearly it’s no fluke). I’m up by 12 points with one game to go.

It’s not impossible, mathematically, for me to lose the pool. If Tkachuk and Barkov outscore Nugent-Hopkins and Ekholm and the Florida Panthers win by 12 points, I lose! That’s unlikely, but possible. Would you bet on me losing the pool? You shouldn’t! But if you’re not a Berman’s Call fan, you just might do it out of spite (soft side).

I’m a huge fan of Annie Duke’s book ‘Thinking in Bets’ and her latest book ‘Quit.’ Read them both if you’re looking for some insight into decision making. After reading many articles over the past few days about the game tonight, it’s clear that recency bias and small sample size (cognitive errors) are dominating thinking.

Recency bias is a cognitive bias that we tend to exhibit when making decisions that overweighs things that are available to us and may be more recent in our memories. Small sample size is extrapolating the number of times something happened and believing that odds are low because something was infrequent in that sample.

Everyone should know that it does not matter that the Maple Leafs last came back from being down 3-0 in a best-of-seven Stanley Cup Final in 1942, but just about every story had that factoid in it. Statistically, we should also know that home-team advantage is a real factor to consider. Depending on the sport or length of the season, the edge is between six per cent (baseball) and 24 per cent (football), with an average of 12 per cent across all sports.

There have been many studies that back this up. So what’s the bet? Most bet with their hearts, not minds. I will likely win the BNN pool because I got lucky picking the players who ended up playing the most games, thus getting the most points.

Those picks did not include one Leaf (though I love the Leafs). I always bet the odds. The odds were that the Leafs were not going to be there, no matter how much I wanted them to be or how much of a Mitch Marner or Auston Mathews fan I am.

My emotional heart wants the Oilers to win for Canada. With seven Canadian teams in a league of 32, Canada is overdue for a win. A Canadian team should statistically win the Cup 21.875 per cent of the time. Of course, none of that matters in one game.

All should also know that the path to a series tied 3-3 matters a bit from a momentum perspective and a confidence perspective, but that edge is also small in one game. Small sample sizes render most statistics rather useless.

In reality, it matters little how we got to 3-3 – conventional wisdom says a hot goalie always wins. I want Edmonton to win, but my bet is Florida! If the odds were more favourable, it might make sense to bet on the Oilers.

When it comes to making investments in stocks or ETFs, the bet to make should be more based on making sure the holding will help you reach your investment goal and less about the emotion of the win. Far too many investors make decisions off headlines (recency) and hype rather than what will help them reach their goals.

Artificial intelligence is dominating the narrative right now and it’s a very real aspect of the future to be sure, but we should not let it dominate our decision making.

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