Editorial: Golf and the Pay-Off Method

The golf season is open after a long winter, so this is an opportune time to voice some thoughts of how golf and forecasting (and incidentally valuation) may share some striking similarities:

Teeing off is the moment of truth, the unskilled player feels an itch as he is not exactly sure which club to choose for the distance, or where the ball will land, left or right. His cone of uncertainty, the projection of possible paths is wide and long.

The skilled player feels confident, he knows that the right club for the 146 meter par 3 is the 8-iron and that with his skill he will be able to land “close to the green”, not too much wide on either side. The cone of uncertainty is narrow and not so long.

This is actually a strikingly good analogy for comparing the unskilled and skilled business analyst; the unskilled analyst knows much less about the business or the markets and is less good at estimating the future, based on his knowledge and skill. When “the event” will take place is also less precise. The cone of uncertainty of the unskilled analyst is wide and long, while the skilled analyst knows more and is likely to be better with both, timing and accuracy.

The pro golfer’s and the diletante’s cone of uncertainty (click to enlarge)

BUT just like with golf, even the most skilled make mistakes. Many have seen golf pros shoot to the crowds, even in the majors or make some other unfathomable errors in judgment – the expectation of high accuracy make “off-the-charts” or in this case “off-the-cone” mistakes spectacular (failures). Nobody is surprised if the unskilled player makes a mistake, as it falls within the expectations. ALSO even the golf pro knows that he may end up in the bunker within the “likely area of impact” – the difference with the pro and diletante is that there is only one bunker in the pro’s likely area of impact, but there are many hazards in the diletante’s likely impact area. Also the pro knows how to get out of the bunker.

The know-how, the skill, and the experience of tens of thousands of repeated shots and played courses the pro golfer has is vested in him personally – it is “normative” – exactly like analysis skill that the expert analyst has acquired; the pro’s skill does not help the next guy’s game (unless he gives tips).

Fair enough, usually there are tips to help us! We may have tools that help us a long way – by this I mean that we may have been able to codify the pro’s knowledge in a system or within a method. The big issue is, if we fully understand the context; if the method is the 8-iron for the 146 meter par 3 tee-shot, then is it also the right method for a 460 meter par 5 tee-shot? Most likely it is not; that’s where being a real pro comes in – the selection of the right club for the shot is key in playing good golf. Horses for courses… not one club for all shots, not one rigid method for all situations!

ALSO, sometimes it makes sense to make the decision to make two “sure” shots rather than one really risky one. The expectation is better; call it staged investment if you like, anyway, we surely are in real options territory!

The organizations with the most skilled business analysts are likely to fare better, because they have a narrower cone of uncertainty (ability to analyze markets) and thus a lower level of risk – even in risky markets. We sometimes call this tacit knowledge, and surely it exists, even if it is sometimes hard to put a finger on it. Similarly a pro golfer will do better in a new course than the diletante; experience is key as long as the game rules stay the same.

The “hero golfer’s” cone of uncertainty    (click to enlarge)

Then there is the “hero golfer” who is a blind believer in his skills and choice of club (whatever the actual skill level), he is blind to the cone-of-uncertainty. There is only one outcome, that is the perfect shot, the hole in one. The hero golfer is an analogy of the analyst that gives his expectation of the future as a single number. He oozes certainty that his estimate of the event timing is spot on and there is no width in the cone, indeed his NPV is a hole in one. I don’t have the confidence of the “hero golfer”, so I like to present my expectations of the NPV as a pay-off distribution.

It seems that golf is an endless source of analogies for business, but it is good also for something else; nothing makes a man humble like golf – all mistakes are your own and you cannot blame anyone else for them. Anything that reminds us of our fallibility has got to be good – at the end of the day errare humanum est.

Mikael Collan

The figure is modified from the 11th hole overview map of Salo Golf (SaG) in Salo, Finland