What Can Investors Learn From Canada’s Favourite Pastime?
Quinn Waddington - Mar 10, 2018
Last week Clifford Asness, American billionaire and co-founder of AQR Capital a New York-based hedge fund, published a white paper on pulling the goalie in hockey and its implications for investing. For the full paper, just ask
Last week Clifford Asness, American billionaire and co-founder of AQR Capital a New York-based hedge fund, published a white paper on pulling the goalie in hockey and its implications for investing. For the full paper, just ask (firstname.lastname@example.org).
Make sure you are thinking about the right risk (and returns) in hockey and investing .
The team in hockey that is down by a goal gains a lot by scoring and loses little if the other team scores.
Pulling the goalie actually reduces the risk of losing the game – it’s an insurance move and the proper risk measure.
In hockey, this means focusing on wins (and maximizing standing points) rather than minimizing goal differential.
Investors make similar mistakes – focusing on the risk of a single investment rather than the overall portfolio.
Pulling the Goalie
Pulling the goalie is one of the more dramatic moves in hockey.
Art Ross is credited with being the first – in a 1931 playoff game between Boston and Montreal – it didn’t work.
The optimal time to pull the goalie is 5:40 in the third period when down by only one goal.
The team that practices optimal goalie pulling gains an average of 0.02 points per game.
Over the course of an 82-game season that is worth 1.75 points – a material difference for no extra cost or work.
When down by 2 goals – pull the goalie with 11:40 to go – if you score – replace goalie until 5:40.
When down by 3 goals – pull the goalie at 17:50, just over two minutes into the third.
When down by 4 goals – you should pull with 35:50 remaining in the game.
When down by 5 goals – you can pull at any time (one might argue that the goalie isn’t doing any good anyway).
Suboptimal decisions in sports causes no net harm and gives quants something to feel smug about.
Suboptimal investing, however, can be a serious problem for everyone.
Pulling the goalie is effectively like an option holder being able to increase volatility on their own investment.
*From the desk of our Managing Director, Kevin Vandermeer