Why do golfers miss an eagle?
Lets see if Prospect Theory can provide us with some explanation.
People’s perception of gain are defined relative to a neutral reference point corresponding to the current asset position. For example, a gain of Rs. 10 is perceived more valuable when we have Rs 100 in our pocket as compared to the same gain when we have Rs. 1000.
The same principle can be applied when we come to sports. In a very interesting paper, the authors explain why a golfer’s performance varies while hitting shots in the same physical setting. In golf, each hole has a par value which is the typical number of shots required to finish a hole. When the putt is one less than the par value then it is called a birdie. If they are under par by two strokes then it is called as eagle. Eagle therefore is better than a birdie which is better than a par.
By analyzing the performance of golfers in multiple tournaments, the authors found out that golfers perceive gain of Eagle with reference to a Birdie less than the gain of Birdie with reference to Par even though the real difference in the scores is the same. As a result, golfers were less accurate in their eagle putts as compared to their birdie putts. However, during the course of the tournament when the golfer’s reference point changed from his performance over a single hole to his overall score compared to his competitor, the accuracy gap between par, birdie and eagle putts also came down.
Thus, changing reference points can significantly change people’s behavior. In one of our consumer research studies, we found out that people’s perception of a discount was different to an equivalent refund of the same amount.
The figures show that a 10% discount operates at the far end of the curve and thus appears much lower. However, a refund brings the point of reference close to the origin and thus appears much higher.
The same principle is also used by retail stores. Instead of offering discounts which are perceived by consumers in reference to the existing price, they offer promotions such as a free printer with a computer. Free promotions are processed independent of current price since their monetary benefit is not explicit. This resets the reference point close to origin and the gain seems much larger.