Goals Are Reference Points

GOALS ARE REFERENCE POINTS

Loss aversion refers to the relative strength of two motives: we are driven more strongly to avoid losses than to achieve gains. A reference point is sometimes the status quo, but it can also be a goal in the future: not achieving a goal is a loss, exceeding the goal is a gain. As we might expect from negativity dominance, the two motives are not equally powerful. The aversion to the failure of not reaching the goal is much stronger than the desire to exceed it.

People often adopt short-term goals that they strive to achieve but not necessarily to exceed. They are likely to reduce their efforts when they have reached an immediate goal, with results that sometimes violate economic logic. New York cabdrivers, for example, may have a target income for the month or the year, but the goal that controls their effort is typically a daily target of earnings. Of course, the daily goal is much easier to achieve (and exceed) on some days than on others. On rainy days, a New York cab never remains free for long, and the driver quickly achieves his target; not so in pleasant weather, when cabs often waste time cruising the streets looking for fares. Economic logic implies that cabdrivers should work many hours on rainy days and treat themselves to some leisure on mild days, when they can “buy” leisure at a lower price. The logic of loss aversion suggests the opposite: drivers who have a fixed daily target will work many more hours when the pickings are slim and go home early when rain-drenched customers are begging to be taken somewhere.

The economists Devin Pope and Maurice Schweitzer, at the University of Pennsylvania, reasoned that golf provides a perfect example of a reference point: par. Every hole on the golf course has a number of strokes associated with it; the par number provides the baseline for good—but not outstanding—performance. For a professional golfer, a birdie (one stroke under par) is a gain, and a bogey (one stroke over par) is a loss. The economists compared two situations a player might face when near the hole:

• putt to avoid a bogey
• putt to achieve a birdie

Every stroke counts in golf, and in professional golf every stroke counts a lot. According to prospect theory, however, some strokes count more than others. Failing to make par is a loss, but missing a birdie putt is a foregone gain, not a loss. Pope and Schweitzer reasoned from loss aversion that players would try a little harder when putting for par (to avoid a bogey) than when putting for a birdie. They analyzed more than 2.5 million putts in exquisite detail to test that prediction.

They were right. Whether the putt was easy or hard, at every distance from the hole, the players were more successful when putting for par than for a birdie. The difference in their rate of success when going for par (to avoid a bogey) or for a birdie was 3.6%. This difference is not trivial. Tiger Woods was one of the “participants” in their study. If in his best years Tiger Woods had managed to putt as well for birdies as he did for par, his average tournament score would have improved by one stroke and his earnings by almost $1 million per season. These fierce competitors certainly do not make a conscious decision to slack off on birdie putts, but their intense aversion to a bogey apparently contributes to extra concentration on the task at hand.

The study of putts illustrates the power of a theoretical concept as an aid to thinking. Who would have thought it worthwhile to spend months analyzing putts for par and birdie? The idea of loss aversion, which surprises no one except perhaps some economists, generated a precise and nonintuitive hypothesis and led researchers to a finding that surprised everyone—including professional golfers.