Keeping Score, Fast and Slow (Hint: It’s Not Just About the Game of Golf)

Most of the times ideas come up from unusual sources, often unexpectedly mixed. This is what has happened with this post, in which I am writing about how score keeping in the game of golf and decision making psychology can provide insights about the valuation of investment performance.

On Sunday Sept. 18, I had the opportunity to be on the 18th hole of the final round of the Italian Open Championship of Golf and to cheer the victory of an Italian golfer. Great event, some pride and lots of fun for me, Italian and golf lover. But, for our purposes, another event marked the day as, in the same competition, one of the best golfers in the world got disqualified for an error on its score card.


Score keeping in golf is a very serious matter.

Accuracy and trust

I am not sure how familiar you are with the Rules of golf, but ultimately any player is responsible to sign his/her score card to “declare” that it accurately reflect the game she/he played according to the Rules. It is not unusual that golfers self-denounce themselves adding penalty shots if they somehow infringed the Rules, even if no one else noticed.

Accurate score keeping preserves the trust and fair-play principles of the game of golf.

Sounds like a statement of principles that would be highly appreciated by investors if applied to investment performance reporting, doesn’t it?

Why I am talking about investment valuation should be no surprise as I regularly do in this blog.

But what has score keeping in golf or investment performance to do with speed?

Speed and effort

On Sunday 18th, not only did I enjoy the day watching great golf but also I spent the evening reading a very interesting book in many of my friends’ A-list: Kahneman’s “Thinking, Fast and Slow” that is about human judgement and decision making dynamics.

Very synthetically, the author suggests that the human decision making relies on two “Systems”, the first being responsible for the fast, no-effort “stereotyped” thinking and the second for the slow, effortful reasoning. He also notes the human tendency to use quite automatically the least energy-consuming of the two systems, System 1, with the higher risk of having decisions influenced by cognitive biases, hence “potentially less objective elements”.

Keeping score, fast and slow

The valuation of investment performance falls easily under Kahneman framework.

Benchmarking is about exercising judgement.

Even a golf score card is about benchmarking. We can say “I played under 100 shots today” (i.e. it took me hitting the golf ball less than 100 times to conclude the 18 holes of a single round of a golf course). Fast thinking about it, many people will have their own quick judgement. Whether that score is objectively good or not is a different matter. Because a golf score implies plenty of benchmarking assumptions. I won’t go into details (but they are available in the various golf-orientated links of this post), but if you are not playing among professionals the field is first leveled by computing the handicap adjustments based on the strike index (yes, the higher raw of numbers in the bottom part of the score card pictured above). Hold on, this is difficult – it requires slow thinking: I have to make plenty of calculations…

Correct! And benchmarking investments is also in the “thinking slow” court!

For simplification purposes, investment performance is sometimes reported in “thinking fast” format.

The perfect example is the Internal Rate of Return (IRR) – the main performance metric used for non listed investments. From being an investment parameter that experienced insiders use in the context of all other information, it has become the primary performance information content passed to all investors, including main street ones. Instead, its proper interpretation requires plenty of other pieces of information. In fact, the IRR doesn’t strictly say how much money it was produced; rather it tells about how quickly money was produced and helps inferring, with other measures, the actual wealth that was created.

Any reported investment performance figure is like the number of shots in the score card. To know how good the number is it takes some slow thinking….

A good toolkit to start the slow-thinking investment benchmarking exercise should always include the assessment of the cash balance, of the residual NAV quality, the calculation of a realistic duration and the computation of a time-weighted return – then it’s about picking the appropriate comparable index over the same duration and being cognizant of the eventual judgement biases…

(The link to a copy of this post can be found also in the author’s LinkedIn profile).

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