Thursday, June 18, 2009

Risk Tolerance (Putting for par versus birdie)

On June 15th the NY Times (1) reported that when PGA Tour golfers from Tiger Woods down to a first time player draw back their putters today at the United States Open, their scorecards will be sabotaged by a force as human as it is irrational: risk intolerance.

According to Professors, Devin Pope and Maurice Schweitzer at the University of Pennsylvania’s Wharton School, even the world’s best pros are so consumed with avoiding bogeys that they make putts for birdie discernibly less often than identical-length putts for par. After analyzing laser-precise data on more than 1.6 million PGA Tour putts, Pope and Schweitzer estimated that this preference for avoiding a negative (bogey) more than gaining an equal positive (birdie), known in economics as loss aversion, costs the average pro about one stroke per 72-hole tournament, and the top 20 golfers about $1.2 million in prize money a year.

The article suggested that this finding may become significant among behavioral economists, many of whom have suspected that the loss aversion found through contrived experiments might not be demonstrated by actual, expert competitors vying for high stakes. The paper is being submitted this week for publication in an economic journal.

The problem that I find with innovation programs in business is that failure is too readily accepted. The issue in business is loss tolerance rather than loss aversion. This is much different than the sport of golf. Professional golfers know what they know and they use it to increase the probability of success of all shots. Even so, golfers can still improve their probability of success from excellent to outstanding.

When it comes to innovation, technologists, marketers and business people have generally not kept track of their information and don’t know how to create the knowledge blocks that are required to solve complex technology and market puzzles. Think about what could happen if technologists, marketers and business people learned how to solve their puzzles as well as professional golfers solve the 18 puzzles they find on a golf course.

1. Alan Schwarz, New York Tines, June 15, 2009


  1. Pretty cool. Can you expand more on loss tolerance vs. loss aversion?

  2. The success rate of all industrial innovation projects is about 5%. This means that 95% of all innovation projects never achieve their goals and this is tolerated/accepted as inevitable. I have often said that there is a failure psychology in industry. This is what I mean by loss tolerance.

    On the other hand, companies that are averse to failure will only pursue projects which are knowledge-based and aimed at market value leadership. This is what I mean by loss aversion.