A behavioural science principle shaping our future
Houston isn’t “good enough” to compete for a championship! These words of former MVP and three-time scoring champion, James Harden set in motion a chain of events the results of which will be felt in the NBA for almost a decade (if not for longer).
Shortly after he made this statement, on January 13th, the world of sport woke up to the news of a four-team mega-deal in the NBA that will require some time to properly evaluate.
The deal saw James Harden move from the Houston Rockets to Brooklyn Nets. In return, Houston gets control over the Nets’ next seven drafts, netting another first-round pick from the Cleveland Cavaliers and also getting three players.
See the following chart for more details on the deal…
The reason this deal stroke me is because of a Behavioral Science principle called Present Bias. It refers to the tendency of people to make decisions in favor of immediate outcomes rather than future outcomes. The reason it’s a bias is because, if you ask people if they prefer to receive $100 dollars today or $120 in a month’s time, many would choose the immediate $100, irrationally passing a quick 20% return. But, if you ask them if they’d prefer $100 in 12 months' time or $120 in 13 months, then they wouldn’t mind the extra month’s wait and go for the $120. The difference is still one month but the choices are different.
The easiest way to think about Present bias is to think about procrastination i.e. the times you go for yet another YouTube or TikTok video instead of working on that project of yours. The videos give you immediate gratification whereas that work project’s benefits sit in the near-distant future.
Back to the NBA deal. You don’t have to be an NBA expert (as am I certainly not) to see what’s happening.
Brooklyn Nets are betting on a short term (and almost immediate gratification) by re-uniting Harden with former teammate, two-time NBA champion and MVP winner Kevin Durant, where they can from a prolific attacking trio with another MBA superstar Kyle Irving. Clearly, the hope is that Brooklyn make a serious challenge for the NBA title.
However, it’s a huge bet. For one, the hope is that the trio is as good on the floor as is the sum of its parts and that the three superstars can gel together. This also makes it highly unlikely to build a high-end defense when they all share the floor and there is not much budget left to make a high-end acquisition given that the deal took the Nets over the salary cap and they’ll have to pay extra “luxury” tax.
On the other side, a more forward-looking Houston find themselves with a ton of future flexibility in trades, and the ability to add additional young talent. Given how disastrous the Harden situation had turned this looks like a good deal not just to me but also to the experts. The folks at Sports Illustrated gave an A- to Houston, while Brooklyn got B-. You can also check The Athletic’s analysis of the mega-trade.
The Science Inspired Strategy of Cleveland Browns
For us, this deal is more interesting from a behavioral science point. And to put it in perspective you have to learn about the behavioral science-inspired strategy of the NFL team Cleveland Browns, whose case was depicted in an article by The Wall Street Journal.
After going 0-16 in 2017 the Browns managed to turn things around to post a 7-8-1 record the following year, thanks, in part, to an analytics team, led by chief strategy officer Paul DePodesta, who was Billy Beane's assistant general manager at baseball's Oakland A's during the early 2000s. Billy Beane’s revolutionary method to assemble a baseball team was made famous by the movie Moneyball, starring Brad Pit.
The article notes that the Browns based their strategy on an academic paper published in 2013 by Wharton's Cade Massey and Nobel laureate Richard Thaler: "The Loser's Curse: Decision Making and Market Efficiency in the National Football League Draft."
In the paper, Massey and Thaler make the point that NFL coaches display a high degree of "present bias". Almost All NFL teams overconfidently believe that they can build a team to have a go at the Super Bowl and are willing to trade up their draft picks into higher rounds or give-away their high-value picks in future years. By doing so, in the long run, they lose a great deal of draft value. So typically, a team wanting a second-round draft pick in a given year would be willing to give up a first-round pick in the next year’s draft.
The Browns met with Thaler, took the ideas to heart. The strategy was basically to exploit other teams' impatience by systematically trading higher-round picks for more lower-round ones and the current year's picks for higher-value ones in future years. Eventually, the high-value picks that they had acquired allowed them to recruit quarterback Baker Mayfield at first overall and cornerback Denzel Ward at fourth overall.
This year, the Browns improved even further to an 11-5 record, just losing 22-17 in the playoffs to current champions and Super Bowl LV contenders Kansas City Chiefs.
As the article predicted back in 2018, if they continue the upward trend we may see them soon in a Super Bowl.
Now, if Present Bias could be used in sports management, what other organisations could benefit from it?
Present Bias during Covid-19 Pandemic
Let’s go back to what Present Bias stands for – the trend of overvaluing immediate rewards, while putting less worth in long-term consequences. For me, it’s clear that this principle is in play in how large parts of society view the Covid-19 related restrictions. People are deprived of the immediate gratifications they get by going to a restaurant, a night-club, or jumping on a plane to go on vacation and this leads to mass protests and demonstrations. Here, I am not referring to the people protesting because they are deprived of the possibility to exercise their profession (i.e. artists, people in the restaurant business etc.) but mostly the people who remain employed but have to endure some short-term restrictions for the long-term benefit of the society as a whole.
Present Bias in Healthcare
Present Bias plays a big role when it comes to Healthcare as it affects people’s decision-making. I’ll share with you a personal story that I think illustrates it well.
I could see how this bias affects my mom’s behavior. My mom is a breast cancer survivor from 2007 but now she has to fight cancer for a 2nd time. She had to endure the hardships that pretty much everyone faces – hair loss, chemotherapy sickness etc. She clearly knows the long-term benefits that come with the successful treatment – she lived to see both of her sons graduate, start a career, find their loved ones, and was blessed to see three grandchildren growing up in front of her eyes. Yet now, when she considers different treatment and procedures she is still most concerned with things like “will this lead me to lose my hair again”, “will it make me throw up”, “will I be able to stand up and walk immediately after the operation” etc.
Present bias also occurs when the negative consequences of a certain behavior are believed to be in the distant future. It is characterized by short-term impatience. This impatience with the future benefits to occur minimizes the motivation for people to take unpleasant actions for their health, like maintaining a diet, refraining from a cigarette or regularly visiting a professional for check-ups
People tend to forget that precaution with their own health to maximize their lifetime and minimize their lifetime medical spending.
Present Bias In Finance
Present Bias is also associated with high desires to spend money and failure to commit to a saving plan. During the Pandemic, the fact is that people’s savings actually increased, which leads us to what we said earlier about Present Bias and the Pandemic. The fact that people were deprived of the ability to spend money on instant gratification things such as dining out, clubbing, or a vacation abroad lead to an actual increase in savings globally.
Impulse Shopping and Tourism
Present bias is also linked with impulse shopping – again people are looking for instant gratification rather than looking for their long-term financial well-being. And guess what, how often does it happen that you blow off your budget and put more debt on your credit card when you go on a holiday.
Time-consistent individuals will be benefiting from the irrational monetary decisions their present-biased economic rivals make. Read more about that in this blog – The 2021 Marketing Game Plan Shift – From Buying From to Buying Into.
Important note! Present Bias should not be confused with Recency Bias, which is another time-related bias. It is a cognitive bias that favors recent events over historic ones. A memory bias, recency bias gives "greater importance to the most recent event.
Talking about the NBA, Recency bias is also something that we can see in there. Research shows that points and turnovers per game in the final period of the season are highly associated with positioning in the MVP race. So there you have it, two more biases (not) to worry about… but be cognizant of…