Investors can learn from Manchester United’s ‘statistical naivety’

Club paying price for turning down chance to expand sample on which to judge Solskjaer

Short-term thinking, confusing skill with luck, the lure of a good story – Manchester United's decision to appoint the unproven Ole Gunnar Solskjaer as their manager was a mistake, according to Aberdeen Standard fund manager Joe Wiggins, and one that investors can learn from.

It's been a difficult year both for United fans and for shareholders. Valued at more than $4 billion (€3.6 billion) last August, shares have fallen from more than $27 to below $19, while the club recently lost its title as the most valuable brand in world football to Real Madrid, according to a Brand Finance report.

Poor performances on the pitch – United finished sixth in the Premier League, ending the season with a miserable 2-0 defeat at home to relegated Cardiff City – mean the club has failed to qualify for Europe's lucrative Champions League. The value of Champions League broadcasting rights is set to jump by more than 50 per cent for the 2019-21 seasons compared with the 2016-18 period, to €5.9 billion, so the revenue impact is significant.

United had hoped to avert such a scenario after appointing Solskjaer as interim manager following the sacking of José Mourinho in December. Solskjaer had "little managerial pedigree", writes Wiggins on his Behavioural Investment blog, outside of a disappointing eight-month spell in the Premier League (he was sacked by Cardiff City after the club was relegated in 2014) and a longer tenure in the minor Norwegian league.


Cult hero

However, as a former United player, Solskjaer was a cult hero at the club and it was hoped he would steady the ship, giving them time to appoint a more experienced manager in the summer.

Early results were exceptional, with United winning 14 of his first 19 games in charge. The fans were happy, as were shareholders, with shares jumping by more than 25 per cent in the two months following Mourinho’s sacking. United “decided they had seen enough”, notes Wiggins, and made him permanent manager on March 28th. Everything has gone wrong since then, with United winning only two of their last 10 games of the season.

Would Solskjaer have gotten the job if United had stuck to their original plan and held off until the summer before making a permanent appointment? Almost certainly not.

United’s assumption was that there was a “causal link between Solskjaer’s skill as a manager and the upturn in the team’s fortunes”, says Wiggins – an “instinctive conclusion” but “not necessarily the correct one”. Simple mean reversion may have been at work; a manager will usually be sacked after an unusually poor run of form, so the subsequent upturn may be partly explained by reversion to the mean.

Just as managers are often sacked after a poor run of form against difficult opponents, Solskjaer may have benefited from a run of easier games. The players may have tried harder to impress the new manager, a “temporary phenomenon” that is “no reflection of managerial skill”. Sheer luck may also be a factor – always a risk when one is dealing with a small sample (and 19 games is a very small sample).

Evidence sample

Even worse, United had nothing to lose by waiting, but instead made an “explicit choice to reject the opportunity to observe a larger sample of evidence” – that is, more games. This acquisition of more relevant information would have been “both beneficial and costless” – there was “no downside to waiting and learning”.

Importantly, you don't have to be an expert in behavioural finance to recognise Wiggins's points. Writing days after Solskjaer's appointment, Irish Times sports writer Malachy Clerkin made the point United "had something here that almost no organisation ever has" – time. Solskjaer, he cautioned, had "earned one of the biggest jobs in world sport by reeling off a streak of results we know not to be his true measure".

It doesn’t matter if Solskjaer goes on to enjoy huge success at United, says Wiggins. The important point is a $3 billion company “willingly and needlessly made a poor decision based on an inadequate sample of evidence”, displaying “statistical naivety and a number of behavioural biases” that will be “painfully familiar” to investors. Outcome bias, myopia, short-term thinking, confusing randomness and skill, ignoring the danger of small sample sizes – all played a part, but the biggest factor may be the club “succumbed to the irresistible lure of a compelling narrative”.

Solskjaer’s return harked back to the club’s glory days that had been lost. The combination of this “nostalgic yarn” and a few months period of strong results “simply proved too intoxicating”, says Wiggins.

Poor decision

Poor corporate decisions are not uncommon. Research shows roughly three-quarters of mergers and acquisitions don't work out; most large capital investment projects disappoint, coming in late and over budget; the vast majority of companies abandon efforts to enter new markets after a few years; more than 80 per cent of start-up ventures from various industries fail to achieve their market-share target. Standard economic theory posits that this is the result of companies taking "rational risks in uncertain situations", writes behavioural finance expert and Nobel laureate Daniel Kahneman in an old Harvard Business Review essay, but flawed decision-making is the more likely explanation.

Instead of carefully weighing up gains, losses and probabilities, managers often make decisions based on “delusional optimism”, overestimating benefits and underestimating costs, focusing on best-case scenarios and paying insufficient attention to potential mistakes and miscalculations.

Kahneman's favourite method for better decisions is the premortem, a simple technique devised by psychologist Gary Klein. A premortem involves executives having a meeting prior to making a big decision. At the meeting, they are asked to imagine themselves in the future, reflecting on why their efforts didn't work out. Executives are asked to write down all the reasons why they think the project failed, offering as much detail as possible and identifying all the possibilities they wouldn't usually mention for fear of seeming impolite.

The technique is, as Klein has put it, “a sneaky way to get people to do contrarian, devil’s advocate thinking without encountering resistance”. Kahneman, who now does consulting work for major corporations, has said companies rarely implement his suggestions, with one exception – the premortem. He once mentioned the idea at the World Economic Forum in Davos, where one chairman of a large corporation told him this idea alone justified the trip.


Most of us never think to carry out a premortem prior to making financial decisions, but the carry-on at Manchester United suggests highly-paid corporate executives – executive vice-chairman Ed Woodward took home £4.15 million (€4.73 million) last year – are often just as guilty. "Seeing one of the largest and most prominent sports teams in the world fall victim to such common decision-making problems", says Wiggins, "is both worrying and comforting".