What Can the UNC-Duke Game Tell Us About Our Investing Selves?

The UNC-Duke basketball rivalry is college’s basketball’s premier regular season event. The two teams face off for the 255th time on Saturday, and even though both teams aren’t as good as their fans are accustomed to, the game still generates a lot of excitement.   

On the surface it seems college basketball has little to do with investing. However, I think a powerful investing lesson can be learned from a study by behavioral scientist Dan Ariely. Ariely conducted an experiment of Duke students who had tickets to the coveted rivalry game and those who weren’t lucky enough to get tickets.

Ariely found the students who had game tickets would sell them for $2,400 on average. Those who didn’t have tickets were only willing to pay $170 for the same ticket. In the securities business that delta is known as bid/ ask spread. And remember, such a spread for a ticket that was free to the person who secured it, is difficult to explain, even on Tobacco Road.

I see the same dynamic (known in behavioral science as the “endowment effect”) with investors who have a loyalty to a certain stock. Sometimes it’s because the person worked for the company, it may have been an inherited stock, or in some cases a stock that has performed extraordinarily well.

Investors should remember there is no “loyalty premium” – your stocks neither know nor care that you own them. A better approach in our view is a broadly diversified portfolio, one driven only by a loyalty to the power of capital markets.