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TANC Behavioural Finance: Lessons from Fantasy Football and Internet Poker Steve Mills 13 September 2012


Important caveats

The views and opinions expressed in this presentation are mine alone and do not necessarily reflect the views of my current employer. Nor the views of my previous employers. The poker hand examples in this presentation are very old. I’m much better at poker now. Really.

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Agenda

What is behavioural finance? What is fantasy football? We all know what internet poker is, right? Examples


What is behavioural finance?

“Behavioural finance can be described as the application of psychology to financial behaviour or, at a general level, the study of human fallibility in competitive markets.” Ian Sykes “The radical insight of behavioural finance is that people are human” Werner De Bondt

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What is fantasy football?

You compete at an auction to build a squad of players They score points depending on what the players do in real life Whoever gets the most points wins

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Fantasy football point scoring

For all players in the team • Scoring a goal • Assist

3 pts 2 pts

For the defenders and goalkeeper • Clean sheet 3 pts • One goal conceded 0 pts • >1 goal conceded -(goals-1) pts

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Talk a Good Game Premier League Roll of Honour 1996-97

Steve Mills

2001-02

Kim & Caroline Milford

1997-98

Guy Maule

2002-03

Dr. Michael Ortmann

1997-98

Peter Richardson

2003-04

Dave Hicks

1998-99

John Millett

2004-05

Connor Dempsey

1999-2000 Paul & Chloe Yates

2005-06

Steve Mills

2000-01

2006-2007 Connor Dempsey

Steve Mills

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Talk a Good Game Premier League Roll of Honour 1996-97

Steve Mills

2001-02

Kim & Caroline Milford

1997-98

Guy Maule

2002-03

Dr. Michael Ortmann

1997-98

Peter Richardson

2003-04

Dave Hicks

1998-99

John Millett

2004-05

Connor Dempsey

1999-2000 Paul & Chloe Yates

2005-06

Steve Mills

2000-01

2004-05

Connor Dempsey

Steve Mills

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We all know what internet poker is, right?

No limit Texas holdem Cards Hand ranking Betting

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Fantasy Football Season: Phase 1

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Fantasy Football: Tips from the experts (1) You’re better off sticking with what you know: established Premiership players. Who is this Andy Johnson anyway?

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Behavioural finance experts say you’re guilty of

m o H

B e

s ia

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In life insurance

Policyholders reluctant to invest in overseas equities Life companies slow to start using derivatives

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Fantasy Football: Tips from the experts (2) For a good indication of what a player’s worth, keep an eye on the real world transfer market. What’s that? David Batty? I’ll bid £4million

You’re laughing, but have you seen Steve play poker?

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You and me baby – we’re in this ‘til the end

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Behavioural finance experts say you’re guilty of

& g n t i r n o e h m c t n s A dju A

Behavioural Finance: Lessons from Fantasy Football and Internet Poker

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In life insurance

How many actuaries does it take to change a light bulb? “How does the cost of the swaptions compare to our realistic GAO liability?� Policyholders choosing risk level or premium in middle of range Slow reaction to change, eg low inflation environment

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Fantasy Football: Tips from the experts (3) We’ve put in £20m for Henry and £20m for Van Nistelrooy. It worked last season, so we thought we’d do it again. I wouldn’t have been able to live with myself if we lost our crown as a result of tinkering with a winning strategy. You’re laughing, but have you seen jwj1967 play poker?

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2 queens

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Someone needs to keep this guy honest

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Behavioural finance experts say you’re guilty of

g e R

t e r

n o i s r e v A

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In life insurance

“What if we hedge our GAOs and interest rates go back up? Then we’d make a loss and I’d get the blame.” “Let’s not move the with profit fund out of equities just yet – if equities go back up we’ll lose out and I’ll get the blame.”

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Fantasy Football Season: Phase 2

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Fantasy Football: Tips from the experts (4) Chelsea keep loads of clean sheets. Every time Robert Huth plays he’ll be picking up points.

You’re laughing, but have you seen Steve play poker?

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I’ve got top pair and the open ended straight draw and this idiot’s walking straight into it!

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Behavioural finance experts say you’re guilty of

O

m i t p

m is

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In life insurance

“Equities always outperform bonds” “We should allow for it somehow in our embedded value….” “…or valuation of our pension scheme”

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Fantasy Football: Tips from the experts (5) Shall I ditch Heskey and make a move for Harewood? Nah – I spent £10m on him and don’t want to make a loss.

It’s smart thinking like that that makes me he great poker player that I am

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I’ve invested too much to back out now

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Behavioural finance experts say you’re guilty of

e M

a t n

A l

u o c c

g n i t n

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In life insurance

Our fund managers want to temporarily shift the overseas fund out of the US and into Japan They’re going to do this using derivatives Let’s monitor the profit/loss on the derivatives – it will tell us whether use of derivatives is a good thing

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Fantasy Football: Tips from the experts (6) I’m holding on to Jonathan Stead thank you very much. 20 games and no goals – that means he’s got 18 more games in which to score his expected 10 goals for the season. Why would I get rid of him just before the upturn? You’re laughing, but have you seen Steve play poker?

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**** ****ing **** ******

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And then, on the very next hand‌‌

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Behavioural finance experts say you’re guilty of

a G

b m

’ r le

F s

y c a l l a

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In life insurance

“Why are we moving out of equities when they go down?” “They’re bound to go up again, in which case we’re selling them when they’re cheap and buying when expensive.”

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Fantasy Football Season: Phase 3

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Fantasy Football: Tips from the experts (7) Yes I’ll have a naan over here. And shall we order some sag aloo? An Indian’s not an Indian without ordering too much food.

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Behavioural finance experts say you’re guilty of

t p u o r G

k n i h

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In life insurance

“So, what are other companies doing about this?” This could be - Selling pensions properly - Moving WP fund out of equities - Hedging guarantees - Writing cheap annuities - ….

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Fantasy Football: Tips from the experts (8) There’s no luck in it. It’s just down to my talent and to German supremacy. The league table never lies. etc etc Just watch me go next season.

You’re laughing, but have you ever talked to Steve about poker?

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I knew you were bluffing all along

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Behavioural finance experts say you’re guilty of

n i H

h g i s d

B t

s ia

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In life insurance

“GAOs never cost us anything for years – we knew when we wrote them that they would never go into the money” “You’ve made us do all this work to zeroise negative reserves and it’s made no difference – we were right all along to ignore the possibility of negative reserves” “I knew when I decided not to hedge that the market would go in that direction”

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Fantasy Football: Tips from the experts (9) If it wasn’t for that Shearer injury I’d have won this season. Just like I did last year when I correctly forecast that ….

Steve will back me up

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That counts as a win in my career records

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Behavioural finance experts say you’re guilty of

S

f l e

n i v r e S

B g

s ia

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In life insurance

“Our UK equity fund was top of its sector over the period October-December 2004” “ABC life’s terminal bonuses on 25-year policies are currently x% - shall I bring you over a proposal form tonight?” “If you bought into our fixed interest unit trust last week, you’d have had an expected return of 6% pa – now only one week later, that’s gone up to 7%”

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And finally How many of the behavioural finance traits described today can you find in this press article from 2006?

“Bonuses on most endowment policies will be lower in future. The reason is companies were instructed or advised to sell equities near to the bottom and buy gilts at inflated prices. This was the safety first option to avoid any risk of becoming the next Equitable Life.�

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“Over the long term, it is axiomatic in investment that higher returns are expected from riskier investments and lower returns where capital risk is low. As the actuaries note, yields on gilts are at their lowest since the 1950s, so bonuses will stay low unless a fund “has exposure to riskier investments such as company shares, and the riskier investments do well”. But if long term interest rates rise, “risk-free” returns will look horrible.”

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“What made them do it? Mainly actuaries, reacting to yesterday’s problems, along with the FSA, which boneheadedly obliged insurers to sell shares at the start of their recovery.”

! Behavioural Finance: Lessons from Fantasy Football and Internet Poker Slide 124


And finally…. Where to find out more Applications of Behavioural Finance – Ian Sykes • Institute Website Making Actuaries Less Human – Nigel Taylor • SIAS Website

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Thank you to….

Fantasy League Professional • pro.fantasyleague.com Pacific Poker • www.888.com Akash Tandoori •Chatham High Street

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TANC