Blog 49: Counterfactual Thinking by Xavier Lo, FIA, FRM, MBA

Still on the theme of Olympics [奧運] this week, and another philosophical topic for all of you guys to think about. Have you ever noticed that some bronze medallists are happier than the people who won silver? Well, some researchers did, and this is all to do with Counterfactual Thinking [反事實思考].

What does this mean? At the heart of it, Counterfactual Thinking basically is asking yourself “what if?” [如果呢]. In other words, the silver medallists [銀牌得主] just barely missed out on winning the gold, and they keep thinking what if they put in just a bit more effort to win the gold? However, the bronze medallists [銅牌得主] are thinking what if they got unlucky and got 4th place – they wouldn’t even have a medal at all! Maybe not all of you guys are Olympic athletes, so let me give you a more relatable example. Imagine you bought a lottery ticket [六合彩] where you can only win if you guess all 6 numbers right (and there’s no other prize) – would you be more unhappy if you got 5 numbers correct, or if you got none of it correct?

Given the above, lets put this into a finance context. Think about customer expectations [客人期望] when they invest into a savings product [儲蓄產品] or an investment fund [投資基金]. Prior to putting money in, they are usually given a projection of what to expect. If the investment performance does better than this, the customers are usually happy. Also, they are sometimes given options to switch funds – how would they feel if the value of their fund rose after they switched away? What if they were not allowed to switch funds, would they feel less unhappy if the value of their funds dropped?

In that case, you might ask why don’t all investment funds just make very pessimistic projections [悲觀預測] of investment performances and give customers no options to change funds? The answer is simple – if that’s what you really offered, you’d probably get no customers at all!