Does Your Inner Scorekeeper Skew Your Judgement?

9 snips

May 12, 2025

Daniel Stone, an Associate Professor of Economics at Bowdoin College, dives into how our inner scorekeeper distorts decision-making in finance and sports. He explains prospect theory using golf and basketball examples to highlight how biases can influence both athletes and everyday financial choices. The conversation addresses the impact of recent performances on tournament outcomes and reveals how emotional responses contribute to political polarization. Stone emphasizes the importance of realistic goal-setting to navigate these cognitive challenges.

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INSIGHT

Impact of Reference Points on Decisions

How we keep score influences our emotions and decisions in finance.
Different reference points can make us feel like we're winning or losing simultaneously.

INSIGHT

Essence of Prospect Theory

Prospect theory shows people compare outcomes to reference points, not absolute values.
Losses hurt about 2-3 times more than equivalent gains feel good, highlighting loss aversion.

ANECDOTE

Trader Behavior Reflects Prospect Theory

Traders up mid-day often stop trading to lock gains, but down traders get sent home to avoid reckless gambles.
This behavior aligns with prospect theory's prediction of risk-taking when facing losses.

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Find more of Daniel Stone's research on his website.
Schwab's newest podcast, Invested in the Game, features true stories of people who are driving the game of golf forward.

In this episode of Financial Decoder, host Mark Riepe is joined by economist Daniel Stone, Associate Professor of Economics at Bowdoin College and chair of the economics department, to discuss his reseach into how behavioral biases shape decisions. Together, they unpack how reference points and prospect theory can skew our judgment, drawing on insights from golf and basketball. Their conversation reveals how the same cognitive patterns that affect athletes under pressure can also influence everyday financial choices.

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