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First, a bit of background to frame whether it was a good decision with a poor outcome, or a bad decision with a deserved bad outcome.
Stakes: If New England wins the game, they will have a chance to secure home field advantage during the playoffs. Conversely, if they lose they will almost certainly not have a chance at home field for the AFC Championship game.
The problem: There are two choices "“ play or punt. The possible outcomes to each are as follows:
If New England decides to go for it, they will either gain a first down and win the game, or will turn the ball over and either stop the Colts and win the game or allow the Colts to score and thus lose the game. Let us assume that given New England does not convert, 20% of the time they will stop the Colts from going 28 yards and scoring, and the other 80% of the time the Colts will score and win.
If New England decides to punt, it will either stop the Colts and win the game, or allow the Colts to score and lose the game.
Game reality "“ During the Colts previous 4 possessions they score on 70 + yard drives quickly twice and turned the ball over within 6 plays twice. Clearly the Colts were much more effective in the fourth quarter than at the start of the game. Maybe the New England defense had tired, maybe the Colts had figured out the New England defense. Regardless of the why, it seems the Colts had picked up a tell on the New England defense.
In order to asses these options, let us assume that winning the game is worth 10 Karma points, given it set New England up for a shot to gain home field. Also assume that losing it was worth -10 Karma points, given New England would likely have to return to Indy for the Championship game.
With that in mind, here is how we look at the decision.
If New England goes for it, here is the value of its decision:
It converts a first down: 65% * 10 = 6.5
It does not convert, but stops the Colts: 35%*20%*10 = 0.7
It does not convert, and Colts score: 35%*80%*-10 = -2.8
The Karma points for going for it on fourth down are: 4.4
If New England punts the ball here is the value of the decision:
They punt the ball and the Colts score: 35%*-10 = -3.5
They punt the ball and the Colts do not score: 65%*10 = 6.5
The Karma points for punting it on fourth down are: 3
Unless the value of losing the game is that much more painful than the +10/-10 relationship we discussed, going for it will put the team ahead more often than punting. The game had a bad outcome for a good decision. This is very similar to how a player with pocket Aces will often lose in Texas Hold'em, if you get all your chips in pre-flop and lose, then it's just a bad outcome for a good decision.
In the investment world, thinking through all the outcomes and understanding the odds of a strategy is critical for success. It is critical to apply level 2 and 3 thinking to investments which consider upside and downside scenarios, as well as the gains and losses from such scenarios before reaching hasty conclusions. While a stock with a low P/E may look attractive, focused research may easily reveal it to be a value trap as incompetent management is not running the company to create value, just as our management quality score has shown over time.
Based on the assumptions used, if Belichick were a CEO, he would be Amazon's (AMZN) value creating Jeffrey Bezos, rather than General Electric's (GE) wealth destroying Jeffrey Immelt.___________________________________________
On Wednesday November 18th, Mr. Tamny, Toreador Economic Advisor and Forbes columnist will be discussing many of the reasons why a declining dollar has been hurting the growth of the US Economy along with:
"¢ Should the dollar move to a gold standard? "¢ Is a trade "deficit" bad for the US Economy? "¢ Why a stable dollar is an essential input when it comes to economic growth. To participate in Mr. Tamny's FREE upcoming webinar, click here
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Value Expectations Equity Research, provides institutional quality stock research through its investment newsletters and stock blog using AFG’s Economic Margin Framework.
The term Value Expectations is derived from our ability to calculate market expectations embedded in stock prices, sectors and indexes.
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