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May 3, 2017
May 3, 2017

What can Arsène Wenger teach bettors about sunk costs?

What is the Sunk Cost Fallacy?

Examining Arsène Wenger’s Sunk Costs

How loss aversion affects decision making

What can Arsène Wenger teach bettors about sunk costs?

Credit: Getty Images

The big debate over Arsène Wenger'd future has divided Arsenal fans into two camps. Is it time for one of the greatest soccer coaches to step down? In this article, we examine what behavioural science has to say about the difficulties of decision making and what bettors can learn from Wenger’s dilemma. Read on to find out.

One of the defining stories of the 2016/17 Premier League campaign has been Arsenal fans' very public descent into civil war. At its core are the increasingly erratic performances of a team managed by arguably one of the greatest soccer coaches ever to grace the beautiful game: Arsène Wenger.

Wenger revolutionised English soccer through the introduction of changes in the training and diet of players. More than 20 years on, however, many fans now believe it’s time for a change. Wenger, they argue, has simply been overtaken by younger managers with newer ideas about how to play.

Sunk costs and the irrational risk-taking that they encourage are commonplace in the world of betting. Most of us recognise them more familiarly as the chasing of losses.

For his part, Wenger is resisting calls for his departure. Having invested so much time and energy into the club which to all intents and purposes has become the love of his life, to part now would undoubtedly feel like an acrimonious divorce. Behavioural psychology, however, has taught us that often our decisions are tainted by the emotional investments we accumulate and the more we invest in something, the harder it becomes to abandon it. Maybe Wenger simply can’t let go. In this article, we’ll explore why and what can bettors learn from it

The Sunk Cost Fallacy

In his best-selling book Thinking, Fast & Slow, Daniel Kahneman recounts the example that economist Richard Thaler uses to describe our irrational attitudes towards past investments.

Two avid sports fans plan to travel 40 miles to see a basketball game. One of them paid for his ticket; the other was on his way to purchase a ticket when he got one free from a friend. A blizzard is announced for the night of the game. Which of the two ticket holders is more likely to brave the blizzard to see the game?

The answer, Kahneman explains, is obvious: the fan that paid is more likely to drive. The reason: mental accounting. Both fans set up a utility account for the game they want to see. Missing the game will close those accounts with a negative balance, but the closing balance will be more negative for the fan that had to pay for his ticket, for he experiences the double loss of losing money and missing the game.

Yet, the money has already been spent, regardless of whether the game is seen or missed. It is an example of a sunk cost, something that has already been incurred and cannot be recovered. An economist (allegedly) wouldn’t care whether he’d bought the ticket or received it as a freebie. The emotions that people attach to the state of their mental accounts, however, are not acknowledged in standard economic theory.

Arsène Wenger’s Sunk Costs

When faced with sunk costs and the prospect of further disappointment and loss, the emotional response is to drive into the blizzard. Giving up often means admitting the failure of previous decisions. When faced with such cognitive dissonance we prefer the torture of additional risks rather than accept we were wrong. In refusing to address rumours of signing a two-year contract extension with a £100 million cash reserve ready to spend over the summer, Wenger appears, as Ouriel Daskal explains in Soccer Issue, to be torturing not only himself but the fans too.

Motivating the chasing of losses is the regret of commission: regretting something we did - for Wenger, it might be a bad player purchase or the perennial failure to sustain early season success.

Arriving in 1996 with a revolutionary approach to player tactics, training and diet, Arsène Wenger was revered as the perfect manager by many soccer fans. Since then, early Premier League successes has been accompanied by Champions League soccer in each of the 20 seasons he has managed; despite an economic straight jacket that has demanded the club remains in profit.

Above all, he has maintained an entertaining style of play. Wenger’s love for the Arsenal is clear for all to see. Steering the ship as they moved from Highbury to the Emirates Stadium in 2006 amidst choppy financial waters, he catapulted them to the fifth richest club in the world. 

With the financial shackles loosening in recent times, fans might well have expected to see another title winning side. Given the income streams available, however, the promise made by Arsenal’s CEO Ivan Gazidis four years ago that they would compete with the likes of Bayern Munich has almost a hollow ring to it, in light of the recent embarrassment at the hands of the Bavarians; the third in four seasons.

In the Premier League, the same pattern repeats itself perennially, found out time and again at the hands of their rivals. Last season presented a rare opportunity for success as the rest of the big four took a sabbatical from their usual dominance, yet Leicester City skipped away with the title. In the summer transfer window, whilst Wenger and the board quibbled over the wages of the player who many saw as the linchpin of Leicester’s success, N’Golo Kante moved to Chelsea.

His season there has seen him voted PFA player of the season and he will likely be a Premier League title winner once again. In sticking firmly to his economic principles, Wenger has missed out on other star players capable of changing a club’s fortunes, most notably Luis Suarez and Xabi Alonso. Granted, he has sprinkled some stardust with the signings of Mesut Özil and Alexis Sanchez and more recently Granit Xhaka, but in general it seems that Wenger refuses to pay the inflated prices the modern transfer market demands. Arguably, the two FA Cup successes of 2014 & 2015 have papered over the cracks of a team that simply should be doing better.

In the face of mounting criticism of his style and methods, Wenger, always known for rational level-headedness and economic scrupulousness, has begun to show some very human qualities.

In the face of mounting criticism of his style and methods it is ironic that Wenger, always known for rational level-headedness and economic scrupulousness, has at last begun to show some very human qualities, with some of his failings, and his reactions to them, laid bare for all to see. His love of the club is one thing, but it’s the apparent obsession that has become troubling, his obsession with power and control, and perhaps the feeling that after his time at the club, he and only he can control its destiny.

Wenger is now more than 20 years into this love affair, but even the most ardent of his supporters at Arsenal seem to have accepted that enough is enough. Love needs reciprocation, but this relationship is looking fairly lopsided. He looks a troubled man, hanging on to something that began to die a few years back, unwilling to let go. Through his escalation of commitment to Arsenal, with more money and increasingly irrational decision making, whilst Wenger may increase his belief that he will succeed, it is unlikely that any of his original problems will be solved.

How loss aversion affects decision making

Committing sunk cost errors, or throwing good money after bad, is part of a wider family of behaviours we exhibit when faced with losses. Together with his long-term colleague Amos Tversky, Daniel Kahneman showed us that we attach value to relative gains and losses, rather than absolute states of wealth or wellbeing. Furthermore, we commonly find that losses hurt about twice as much as gains are enjoyed. Such a bias towards loss aversion has evolutionary roots: organisms which prioritised the fear of loss over the enjoyment of success were less likely to end up as something else’s lunch.

One significant consequence of such loss aversion arises when we are faced with a high probability of failure: go all in. If there is a 95% chance of betting and losing 1,000 versus the certainty of losing 950, most of us would take the gamble. By contrast, if offered a 95% chance to win 1,000 or take 950 for sure, most of us would play safe. In the face of declining performances, player unrest and fans’ protest, Wenger looks to be rejecting an acceptance of failure in favour of arguably a riskier pursuit of success, at least in terms of his long-term reputation. In reality, economists like Wenger, being human beings too, will just as readily commit sunk cost errors as anyone else.

What can bettors learn from Arsène Wenger?

Sunk costs and the irrational risk-taking that they encourage are commonplace in the world of betting. Most of us recognise them more familiarly as the chasing of losses. Paradoxically, loss chasing is actually an expression of loss aversion. Everyone remembers the story of Barings bank trader Nick Leeson, who lost £827 million chasing past mistakes with Martingale-style trading gambles that ultimately led to the bank’s collapse and his imprisonment.

Wenger looks to be rejecting an acceptance of failure in favour of arguably a riskier pursuit of success, at least in terms of his long-term reputation.

Whether through a refusal to accept that one is unable to beat the house, the market or the bookmaker, or a more dangerous use of progressive money management, the likelihood is that a refusal to accept a short-term failure will be compounded by further losses. The risks associated with chasing previous gambling losses has been examined in the article How to choose a staking method based on your betting profile.

Motivating the chasing of losses is the regret of commission: regretting something we did. In Wenger’s case it might be a bad player purchase or the perennial failure to sustain early season successes into the business end of a Premier League campaign; for bettors it might be an ill-thought-out wager. The regret of commission is more powerful than the regret of omission: the fear of missing out.

Again, this is because losses hurt more than gains are enjoyed. Were Wenger to depart now, he might suffer omission regret in wondering what might have been had he stayed. The regret of existing failures, however, will likely prove to be a stronger motivator in seeking to put them right. Given this bias, it is likely that his love affair with Arsenal has another chapter waiting to unfold. Fans might not like it, but at least they now have an explanation for why it is happening. Pinnacle’s Betting Resources aim to help its customers avoid errors of judgement like the sunk cost fallacy and the fear of regret. Perhaps Arsène Wenger can teach us a valuable lesson in this respect too.

The article has been co-authored by Buxton Gooner.

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