Authors: Victor Hagani and Richard Dewey

Download a PDF COPY of the research summary

Download the research paper HERE

Hagani and Dewey gave a group of college-educated finance professionals $25 to bet on a series of coin flips. Participants flipped a biased coin with a 60% chance of coming up heads. They were told that the coin was biased. Amazingly 28% of them went broke!

Coin Flip Results

What went wrong? We can’t tell you because it will spoil the fun. Read the information under the subheading “2 The Experiment” of the paper and decide how you would bet your $25. Then read on and see how your strategy compares with the participants in this study.

What does coin flipping have to do with investing in the stock market? The real (i.e. inflation adjusted return) to US shares over the last 50 years was a bit over 5%. The annual standard deviation was about 15%. This results in a return/risk ratio of 0.33.

Many investors believe that high stock market valuations and the possibility of rising interest rates will result in lower returns. Let’s assume that they’re correct and the future return/risk ratio for investing in shares is 0.2, That’s the same risk/return level as the coin toss betting game.

Hagani and Dewey designed the game to replicate the type of return/risk trade-off that investors make when investing in the stock market.

Obviously, there are a lot of differences between flipping a coin 300 times in 30 minutes and investing in the stock market for the next 30 years. But it’s unclear whether these differences make these results more or less relevant. Hagani and Dewey observe:

Perhaps investing in the stock market is much more nuanced and complex than betting on a biased coin, or perhaps it’s easy to stick to a sound, albeit boring, strategy for 30 minutes but impossible to maintain that discipline for 30 weeks, months or years.

Author’s Conclusion

Without a Kelly-like framework to rely upon, we found that our subjects exhibited a menu of widely documented behavioural biases such as the illusion of control, anchoring, over-betting, sunk cost bias and gambler’s fallacy…

These results raise important questions. If a high fraction of quantitatively sophisticated, financially trained individuals have so much difficulty in playing a simple game with a biased coin, what should we expect when it comes to the more complex and long-term task of investing one’s savings?


Stock-picking skill matters less than we think. Money management (i.e. buy, hold, sell and position-sizing decisions) skill is arguably just as important (maybe even more important). Even in a game where the odds are in your favour, poor money management will be your undoing.

Investors need frameworks. Otherwise they will find themselves at the mercy of their behavioural biases.

Formal economic and finance training teaches very little about taking risk when faced with uncertainty. In this regard, there’s probably no substitute for experience.

Download a PDF COPY of the research summary

Download the research paper HERE


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