Bronze Trumps Silver? Counterfactual Thinking and the Olympics

There have been plenty of stories of triumph and disappointment thus far at the Rio Olympics.

Hidilyn Diaz became the first Filipino woman to ever win an Olympic medal when she took home the silver in the 53-kilogram weightlifting class. South African runner Wayde van Niekerk (who is coached by a 74-year-old great grandmother) won gold in the 400 meters, breaking Michael Johnson’s 17-year-old world record. Jamaica’s Usain Bolt once again proved he is king of the 100-meter sprint and still the fastest man in the world. US swimmer Missy Franklin, meanwhile, failed to qualify for the 200-meter freestyle and 200-meter backstroke finals, while British canoeist David Florence blew his hopes of an Olympic medal when he finished last in the final.

But the story that really grabbed my attention was that of the Chinese swimmer Fu Yuanhui who won a bronze medal in the 100-meter backstroke (“The Exuberant Chinese Swimmer Who Has Become a Star at Rio“). It reminded me of a 2012 blog post on the psychology on display at the medal ceremonies.

It turns out that if you look at the emotions shown by the silver and bronze medalists, as a team of researchers did following the 1992 Barcelona Olympics, the bronze medalists tend to be happier than the silver medalists. That may sound counterintuitive, but it has to do with something known in psychology circles as “counterfactual thinking,” or the tendency we all have to imagine alternatives to reality — the “what ifs?” and “if onlys” that often accompany defining moments in our lives. Said another way, we are all inclined to ponder what might have been if just one circumstance was different.

In a 2009 essay, “Counterfactual Investing,” Cabot Research noted that “Emotional responses to outcomes often are influenced by what might have been,” and counterfactual thinking often ends in regret. “The emotional response to an event depends on how easily one can conjure up alternate outcomes that are either better or worse,” the article said. “An often-cited example regards missing a flight by [five] minutes or by 45 minutes. People who just barely miss their flight tend to kick themselves more than those who missed their plane by a mile. The closer you were to making the flight, the easier it is to construct an alternative outcome or counterfactual that triggers regret.”

In the 1995 study, “When Less Is More: Counterfactual Thinking and Satisfaction among Olympic Medalists,” the researchers explained their findings by reasoning that, for the silver medalist, the obvious counterfactual alternative is capturing the gold. To the bronze medalist, it is finishing without a medal. In other words, the silver medalists think about how close they came to winning gold (but didn’t) whereas the bronze medalists think about how close they came to not medaling (but did — phew!). So silver medalists compare themselves to only one other athlete, the winner, whereas bronze medalists compares themselves to all the other competitors who didn’t place in the top three.

(As a comedic aside, Jerry Seinfeld explained Olympic medals and counterfactual thinking in one of his stand-up routines: “Think about it, you win the gold, you feel good. You win the bronze, you think, ‘Well, at least I got something.’ But when you win that silver, it’s like, ‘Congratulations, you almost won. Of all the losers, you came in first of that group. You’re the number one loser. No one lost ahead of you!’”)

The philosophical roots of counterfactual thinking can apparently be traced back to early philosophers such as Aristotle and Plato. And more than a century ago, psychologist William James noted: “So we have the paradox of a man shamed to death because he is only the second pugilist or the second oarsman in the world. That he is able to beat the whole population of the globe minus one is nothing; he has ‘pitted’ himself to beat that one; and as long as he doesn’t do that nothing else counts.”

All this got me wondering whether counterfactual thinking could be applied to the world of investing and whether financial advisers could glean any insights from this area of research.

As it happens, a team of researchers published a study titled “Once Burned, Twice Shy: How Naive Learning, Counterfactuals, and Regret Affect the Repurchase of Stocks Previously Sold.”

According to the authors, investors are one-half to two-thirds more likely to:

1. Repurchase stocks previously sold for a gain rather than stocks they previously sold for a loss.
2. Repurchase stocks that have lost rather than gained value following a prior sale.
3. Purchase additional shares of stocks that have lost rather than gained value since being purchased.

All these behaviors were consistent with counterfactual thinking — looking back at what could have been — and investors’ desire to avoid regret and instead feel pride.

“Suppose you sell a stock for $100, trading later for $120. If you buy it back, you’re going to regret it because it’s now more expensive,” said Terrance Odean, professor of finance at the University of California’s Haas School of Business and a coauthor of the study. “On the other hand, if it’s trading at $80, now you feel good because you timed it right. Investors choose what they buy and sell to some extent to manage their own emotions.”

The researchers explained that investors who sold for a gain had positive associations with investing in that stock and would repurchase the shares. If the price was higher than the level at which they had previously sold the stock, the investors would always anticipate regretting that it would have been better if he had never sold his investment. But an investor was more likely to re-buy a stock that was valued lower than what they sold it for because it would make them feel happy and proud and that they sold at the right time.

While it makes emotional sense that investors would want to avoid stocks on which they’d previously been burned, counterfactual thinking doesn’t necessarily result in the soundest investment decisions. So, how can investors see past the emotional baggage of past trades? As with any cognitive bias, the key to seeing past counterfactual thinking is to actively engage the reflective brain. Wall Street Journal investing columnist Jason Zweig has outlined some simple steps to help investors exercise the reflective brain and distance themselves from the emotions that may be driving their decisions.

Even for Olympic athletes, the key to success is clear thinking: training the mind like you would train the body.

“The physical aspect of the sport can only take you so far,” says Olympic gymnast Shannon Miller. “The mental aspect has to kick in, especially when you’re talking about the best of the best. In the Olympic Games, everyone is talented. Everyone trains hard. Everyone does the work. What separates the gold medalists from the silver medalists is simply the mental game.”

Editor’s Note: An earlier version of this article was first published on 10 August 2012. It has been updated to reflect the 2016 Summer Olympics in Rio. 

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/PhotoAlto/Sandro Di Carlo Darsa

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