This past weekend over 50,000 runners started the New York Marathon. Many of you have given the marathon a go or at least it’s crossed your mind even as a distant thought. Finishing a marathon is extremely difficult, but yet over 500,000 people in the US alone run them each year. The power of setting goals. And then there is goal within the goal, the finishing time. We like to target round numbers. 3 hours, 4 hours. The best in the world are trying to break 2 hours…unaided. Roger Banister broke the 4 minute mile. Our world revolves around these types of reference points. References points that are just random.
Two weeks ago the newsletter MorningBrew.com wrote about the 2014 study of marathon times from a database of 9 million different times. As you can see from the chart most of the finishing times are close to the round numbers. 3 hours, 4 hours, 5 hours. Also on the half hour. But right after those targets, the amount of finishers drop of significantly. It shows the power of setting goals, and the effort we put in if the goal is close.
In prospect theory we are not rationale. In order to tolerate a possible $1000 loss, there must be a potential reward of $2000. If 4 hours is your marathon reference point, 3.59 is euphoric, while 4.01 is unbearable.
What reference points do you use when you invest?
What are your goals?
Are they rationale?
Does it matter if they are not rationale?
Can you attain your goals through your own work and grit or do you rely on a less reliable source like the capital markets?