Sandbagging and how not to be Yamada

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There are lots of expletives thrown around the course during the (sometimes) gentlemanly sport of golf. But there is one word in particular that when said in earnest about another player isn't simply an insult, but an accusation. It's often mumbled quietly over beers after thousands of amateur tournaments each year. The word is Sandbagger.

If you're unfamiliar with golf gambling parlance, it refers to a competitor that systematically overstates his or her handicap. Over enough games an inflated handicap, even by a couple strokes, will mathematically ensure an edge, and the profits that come with it (if you’re properly gaming).

The Sandbagger may not always win, but just like an astute card counter at the blackjack table, tipping the odds in one's favour to a minor but meaningful amount over enough iterations, (other variables aside) can mathematically ensure a positive expected gambling outcome. So how do cheating golfers pull this off? The most unsophisticated method is to simply not post low scores into the handicapping system, or to fabricate higher scores. More savvy hustlers employ more advanced techniques. For instance, when a match doesn't matter part way through, or during a match that has minimal financial implications, the Sandbagger might decide to not line up a putt and maybe, just maybe miss it. Or hit a terrible bunker shot on purpose. Or pull the wrong club from 150 yards out. Even delaying entering a good score from the day before for today's big money match is common practice among this despised breed.

Tour pros don't worry much about this, they all play a gross (not net) game at their events. But if you think that Sandbagging is reserved simply for cash games at your local club, think again. In 1995 at the AT&T Pro-Am at Pebble Beach, the winners of the Pro-Am better ball component of the tournament were announced as Bruce Vaughan (being the pro) and Masashi Yamada. Vaughan played terribly, shooting 71, 75 and 79 through 54 holes. But in the world's most prestigious Pro-Am, the team score was enough to put them into the final round on Sunday, where they posted a team net score of 59. They were awarded their hardware and went their separate ways. A month or so later, while reading a golf magazine, USGA Rules expert Dean Knuth came across the tournament outcome. After making some calls, he determined that Yamada had been playing off a 15 handicap during the tournament. Some simple probability calculations had Knuth scratching his head. Yamada, off a 15 handicap, had shot or broken 79 on four consecutive days. This is statistically next to impossible for a 15. After a flurry of phone calls and faxes, it was determined that Yamada was in fact a mid-single digit handicapper (5) in Japan, and he and Vaughan were stripped of their title by Pebble Beach chairman Clint Eastwood. It turned out that the 72 year old Yamada was one of the better known amateurs in Japan (it didn't hurt he was a wealthy and connected real estate tycoon). David Duval and his agent/playing partner, Hughes Norton, were awarded the Pro-Am title over a month after the tournament finished.

"This comes pretty close to being a desecration," said Sandy Tatum, the former USGA president who won the event in 1961. "I'm only glad Bing didn't have to deal with it." (Bing Crosby used to be the tournament organizer).

Needless to say, Yamada was never invited back to the event.

Needless to say, Yamada was never invited back to the event.

Now and then you run across the opposite, a reverse sandbagger. This is the guy who claims he is a 5 handicap and proceeds to shoot a 93, claiming a "bad day". They are often referred to as having a 'vanity handicap'. The surface motives behind each of these behaviours is pretty clear: in the case of the Sandbagger it's to win more bets, for the reverse Sandbagger it's to maintain an unrealistic narrative about themselves as a golfer. The motivation to maintain a positive self narrative, to stoke an ego that cannot hold up to the smallest amount of pressure or critique comes at the cost of actually improving (not to mention being a human ATM). Having said that, among gamblers, no one really worries about the second type of golfer, after all, they are throwing away money (if they will actually lay a bet). But the implications of this type of thinking off the golf course can be very different.

From a psychological perspective, Sandbagging has been explained as "A self-presentational strategy involving the false prediction or feigned demonstration of inability." But what successful Sandbaggers know, and has been shown in studies (Baumeister, 1984), is that largely speaking, public expectations of success inhibit performance, while private expectations of success facilitate performance. The successful hustler is able to compartmentalize the two, and is able to feed off the subsequent self- presentation benefit by improving the perception of his recent performance. During the match, external observers had lowered expectations for the performance. The ‘bagger’ still thinks he is going to win, he is merely acting the part. The Sandbagger's wallet is not only made fatter, but in many cases his confidence swells as well, with the positive feedback coming from the social dynamics of the victory and apparent excellent play. This works until it doesn’t…

In sports we like to talk about 'clutch players', those that rise up in the biggest moments in the biggest events. Research shows that for the vast majority of professional athletes at the highest levels, increasing performance pressure (mainly through high observer expectations) leads to more instances of choking under pressure. Of course there are outliers that consistently thrive in these situations, and many of these figures are enshrined forever in Cooperstown, Canton, Springfield, St. Augustine, and Toronto.

The successful hustler has a method to his madness, and is typically pretty astute on knowing when to leave it all out there, and when to back off. They are audience and opponent manipulators. This is very different than what are known as 'self-handicappers' - the much more typical guys you come across that practice negative self-presentation before a match. He wants to avoid negative ability attributions that will come from a poor performance. Call it a very expensive ego hedge. Unlike the Sandbagger, the self-handicapper does not feel confident about the outcome of the match to such a degree that ego maintenance is more important than the actual game. The Sandbagger and the self-handicappers are very different animals.

Gambling aside, the strategy of sandbagging with the goal of (perceived or real) lowered public expectations are legendary in sports. Former Notre Dame football coach Lou Holtz used this technique to great effect. In 1993, before a stretch of games against tough opponents, he said "We're not a good enough football team to play the people we have to play". They were 5-0 at the time, ranked 4th in the country. They won the next 5 games handily, and nearly made it to the national championship after a last minute field goal by Boston College.

Playing the (meta) game

Playing the (meta) game

The problem comes from using this technique too often. For starters, if you're a billiards shark, golf Sandbagger or darts hustler, you start losing the ability to control your audience over time - which often is comprised of your potential future opponents (marks). No one wants a game with the Sandbagger, but everyone wants one against the guy with the vanity handicap. The negative self-presentation (the act) has the potential to bleed through into your actual confidence that you need to compete. If Holtz pulled this move every season or every week, no doubt its efficacy would wane. In gambling, only highly functioning sociopaths can indefinitely maintain this level of compartmentalization, assuming they can still get a game. Another cost is the potential reputation, perception or cartoon that one is trying to maintain in the long run. We've written previously about the value of multi-play games. The famous saying "Listen, if you can't spot the sucker in your first half hour at the table then you ARE the sucker" only has half the story right. Once you identify the sucker, you do everything you can to keep that person in the game. Insulting him, belittling him, laughing at his hands - that is a bad financial planning. You don't kill the golden goose.

Much has been said about corporate short term-ism. That is the propensity of public companies, investors and the oft vapid financial media to fixate on 'making the quarter' and 'beating the whisper'.

A recent study claims that "the amount of value destroyed by companies striving to hit earnings targets exceeds the value lost in high profile fraud cases". The core belief is that hitting earnings estimates builds credibility with the investing community and CFO's are willing to sacrifice long-term economic value to deliver increases in the company's stock price in the short run. "A surprisingly high 78 percent of the surveyed executives responded they would destroy economic value in exchange for smooth earnings. The executives believe that unpredictable earnings—as reflected in a missed earnings target or volatile earnings—command a higher risk premium. In short, CFOs argued that the system (that is, financial market pressures and overreactions) encourages decisions that at times destroys long-term value to meet earnings targets"

Various prescriptions to re-calibrate short-term-ism of corporate behaviour are very in vogue now. They are part of the G in ESG. Tweaking incentive structures and accounting allowances under the guise of corporate governance is #trending. Maybe that's the right place to start, maybe it's not. But it's kind of like fiddling with minute scoring rules in golf in an attempt to abolish sandbagging. Dean Knuth came up with system to mitigate the effects of sandbagging in golf tournaments. It works to some extent, but it leaves many other areas unaddressed. In Yamada's case, this was a post-hoc analysis by Knuth initiated only by his tournament win (and Knuth browsing through a golf magazine). Yamada had played the AT&T Pro-Am the year before his win using the same 15 handicap. He hadn't won in 1994, and no one ever brought up his sandbagging until the following year's victory. But his victory put an audit into motion. The problem is that these concepts of self narrative development (which related to corporate identity) are hard-wired into us. If a hustler wants an angle, regardless of the short-term consequences, he will find it. Or go down in flames trying.

Much here can be applied to investing. In the universe of equities I follow, my peers and I all know many of the companies that often take the short game of presentational strategies too far. A little bit of sandbagging the quarter is the norm. Mark it up to putting your best foot forward. "These guys always beat their quarter" is a nice little narrative that helps the sell side execute the rotation trade. Reverse sandbagging perpetually just comes off as being promotional and well, missing the financials consistently doesn’t look great. That's not to say it doesn’t happen (it does) and then attempts to rationalize it away look just like the guy with the vanity handicap making excuses. Many of the more extreme examples lead down a more dangerous path. Taking ‘normal’ things like securitization and leverage and redlining them to levels that can undermine the well being of the company/industry/economy. This is where Fast Eddie Felson has his thumbs broken. Epsilon Theory would call this poor meta-game management.

Doesn’t make the double bank shot any easier

Doesn’t make the double bank shot any easier

Some of us have seen firsthand the intense amount of effort many management teams put into 'presentational strategies'. I've had CEOs ask me how they can best stay in a sub-index, or how they can manage their financials to 'get on the quant screens'(!). I've even heard "what sort of quarterly numbers or guidance would get the shorts scrambling to cover my stock?" My response is typically something like "Well, what are the tools at your disposal and how would you use them?" I am basically asking how far they are willing to go. From this, we can maybe, possibly, deduce if they are in fact likely to destroy long-term value for short-term gain. Then again, sometimes not. In any case, it pulls the curtain back a little bit on how they are thinking about their corporate self narrative.

The long-term costs of being the Sandbagger or the hustler are real. Want a gambling game with your pals at the club? Good luck if your cartoon is that of Fast Eddie Felson. Want to be invited to net play tournaments? Sorry. How much energy are you wasting trying to hustle a few people, and what are those opportunity costs? How will others extrapolate your golf/gambling cartoon to other walks of life? And the reverse sandbagger just looks like...well a loser that lacks self confidence. And that costs you too. It is much easier to spot the reverse Sandbagger than the Sandbagger. Don't be like Yamada, don't be like Fast Eddie, and don’t be the CFO explaining that the weather screwed up ANOTHER quarter. Play the meta-game correctly. Understand that in real life, when the long game is botched, the end looks more like that of Yamada's or Lehmann Brothers and less like Fast Eddie Felson's. Fast Eddie got a sequel in ‘The Color of Money’, but Yamada never got another invite to the AT&T Pro-Am.

Institutional Memory and the Neuralyzer

‘Institutional memory’ is typically thought of as an organization’s collected knowledge of facts, experiences and concepts.  Knowledge is often forgotten, shaped, interpreted and reinterpreted over time. Sometimes institutional memory is enshrined in icons like logos, buildings, or mythologies, which serve as mechanisms to ensconce institutional knowledge into a an identity, or even an ideology.

Most of us acknowledge that storytelling has always been the key to culture – from passing down stored knowledge like tribal history, specific technical knowledge (how to build something) or cultural customs. We are predominantly evolved to learn and communicate through narrative. Even one of the oldest stories we know, “The Epic of Gilgamesh” has the same literary themes you’ll see in your favourite Netflix show: A king and a rival fight, become allies, set out on a hero quest, one of them dies, a reprisal second quest begins, and the true nature of reality presents itself.

Nothing ages faster than yesterday’s vision of the future
— RIchard Corliss

There are natural reasons for institutional memory to change and fade over time. As resource optimizing mammals, we are wired to focus brain cycles and calories on whatever seems the most pressing to survival and well being. Employees with knowledge leave organizations, records aren’t read or disappear and memories fade. Managers focus on beating last quarter’s sales figures and hiring employees that bring in revenue come hell or high water.                             

One narrative common in economic history is that the German Bundesbank had a stored set of memories directly linked to the economic experience of the hyper-inflationary Weimar Republic. This is tethered to the narrative that the German people had also developed a national psyche that orbited around the perils of hyperinflation, even post WWII. Google ‘Weimar Republic’ and take a look at the images associated with the topic. They look the image below.

German newspapers and national narrative post WWII and pre-ECB were very sympathetic to the Bundesbank’s hawkish execution of its price stability mandate.

There were A LOT of terrible consequences for the German people that were compounding as reparations went unpaid. The French occupied the Ruhr, limiting access to coal and signalling that the Versailles Treaty would be enforced. The Republic used extensive propaganda in an effort to conceal the rate of price inflation from the public, closing stock exchanges, instating price controls, and blaming both the WWI defeat and the horrific economic condition on deserting soldiers (who weren’t being paid regularly during the rebuilding of Germany). After numerous coups and assassinations, the 1932 Reichstag elections established the NSDAP as the largest party in parliament and set the stage for a series of events that would eventually set Europe on fire.

So did institutional memory influence the policies of the Bundesbank in the ’57 to ’90 period? Probably. Popular pictures like the one below, of people using bank notes to wallpaper their houses and for use as coffee tables had become a part of the German collective memory of pre-WW2.  

Children playing with stacks of hyperinflated currency during the Weimar Republic, 1922.jpg

Germany didn’t finish paying their WWI reparations until 2010! Trying to decipher the status of WWII reparations is even more complex, with multiple amendments since the 40’s, and as recent as 5 years ago Greece and Israel both claimed that Germany owed further payments. Decades of Soviet occupancy was the cherry on top of a multi decade tragedy for the German people.

Most historical narrative from academia does link the national political instability exacerbated by 1920’s hyperinflation to the rise of the Nazi party. And has linear narrative preferring apes, it makes sense, after all it came right before. Digging deeper on the topic is PhD thesis material, and way over my pay grade, but it’s safe to say that the printing presses were at a minimum a destabilizing force, what Soros would call positive reflexivity.

The below chart illustrates the success of the Bundesbank in capping 1970’s inflation.

Gordon Norris.jpg

Image credit: Figure 2 in "How the U.S. and Other Countries Experience Inflation" by OpenStaxCollege, CC BY 4.0

By the time the ECB was established in 1998 and the next phase of the European project was firmly underway, effectively moving monetary policy decisions to the single mandate ECB, the developed world had not seen anything that had resembled 70’s, or even ‘80s inflation. If the lessons of the 1920’s and 1970’s had left some remnant of institutional memory within German central banking by the late 1990’s, surely this at least the beginning of the end.

The BIS did a study in 2003 entitled “The institutional memory hypothesis and the procyclicality of bank lending behavior” with the goal of determining (a) is bank credit creation procyclical? (hint: yes), and (b) does this occur because of institutional memory, in particular how it changes throughout the business cycle (hint: yes, partly). The study considers the idea that during a cycle boom, overly optimistic lending officers ease credit standards and get caught up in some classic behavioral finance traps. Secondly, few officers or executives from the previous cycle were still in the organization – they had lost institutional memory. The net effect is that bank lending in this manner exacerbates business cycles, increases systemic risks, and makes regulators jobs harder.

This describes the natural decay of institutional memory. This can happen at different rates with different consequences depending on the type of organization and exogenous environment. With each passing year since the GFC, less PMs, risk managers and even CIOs have experienced risk management in a non-centrally planned environment. Talk about modelling errors being institutionalized! As with each passing generation of Germans, the power of the cautionary tale of the destructive nature of hyperinflation is gradually diluted and slowly fades away. It is not ‘deleted’ from history, instead is subject to the human phenomenon of rationalizing resources to a threat that hasn’t materialized in generations.

I recall working on an institutional trading desk in 2008, and some of the more well read senior guys on the desk cited ‘moral hazard’ as a major determinant of how the crisis would play out. They were wrong. Few in the mainstream narrative talk about moral hazard much anymore. It’s embarrassing for many to acknowledge they thought the Fed would actually a number of banks fail on the basis of reputational integrity (ha!). So we ignore that we thought that, we slowly change our assumptions about the way they will behave, and we drive on.

No one cares or talks about this anymore. Nothing to see here. A perfect example of a narrative losing Attention, even though ‘price stability’ is one of the Fed’s dual mandates’

No one cares or talks about this anymore. Nothing to see here. A perfect example of a narrative losing Attention, even though ‘price stability’ is one of the Fed’s dual mandates’

Who controls the past controls the future. Who controls the present controls the past
— Orwell
The past was erased, the erasure was forgotten, the lie became the truth
— Orwell

What we are facing now is much more dangerous than the seemingly natural Alzheimers that institutions go through. Forgetting the lessons of history slowly is like a trench-warfare. What we are facing now is the nuke dropped on the trenches that happens in an instant and no one sees it coming until it’s too late.

As with Orwell’s Newspeak, controlling language is the thoroughfare to control of ideas. Consider how many of Alinsky’s ‘Rules for Radicals’ concern narrative dominance. The SJW’s know this. The politicians and the corporate oligarchy know this, and technology has allowed them the means to scale their efforts in ways that would have made Oceania’s Inner Party jealous. We can rename old ideas into acronyms like MMT, rebranded and repackaged for the nudging-turned-shoving state and elite to use. It’s a function of the modern zeitgeist, not a flaw, that we can barely agree on basic facts.  Orwell’s memory hole exists in institutions all around us. Cue the Neuralyzer.


Reformat and Rewrite

So what happens next? More of the same - more rewriting of institutional memories, more financialization, less subtle and more overt nudging by the state and oligarchy toward what they want you to think. More cognitive dissonance between the ideas that we have about institutions and what they are actually going to be doing. That in itself is a powerful weapon for the state and the elite - it at least gives them cover for a while, until people figure it out, and then it’s too late for them. And then inflation, which with its consequences, has components of both computational irreducibility (a model or formula cannot solve for) and radical uncertainty - we can’t even imagine what we should be worried about. But we won’t, because we can’t.

Fighting (and Modelling) the Last War

“History must be lived forwards, but can only be understood backwards”

In military parlance, the concept of ‘fighting the last war’ is understood as leadership applying the tactics and lessons from the last major conflict to the current situation. The costs can be catastrophic. German cavalry in 1914 appeared on the battlefield in the spiked Pickelhaube helmet, spears, and beautiful mounts. While they may have looked dashing, their ineffectiveness by 1915 led to the Cavalry Corps effectively being redesignated to infantry units given the emergence of machine gun and trench warfare.

German Cavalry, 1914

German Cavalry, 1914

Otto von Bismarck in the Pickelhaube, circa 1880

Otto von Bismarck in the Pickelhaube, circa 1880

France’s famous Maginot Line was reminiscent of fortified trench systems from World War I, even as the Germans had developed a new method of combat, “Blitzkrieg”, that effectively rendered the Line nearly useless. Korea, Vietnam, and more recent conflicts have shown that this phenomenon is not something that modernity has inherently ‘figured out’, instead for thousands of years, kings, generals and officers have lost battles, wars, nations and empires by fighting the ‘last war’.

 Any given Sunday, you will probably see some NFL coach fighting the ‘last war’ – an outmoded and predictable set of plays that will likely lead to a few wins and his job. In the trenches of WWI, the consequences were catastrophic. Millions of lives were thrown into the meat grinders of the trenches due to inept leaders not adapting to the new rules of battle.

 Central banks are the modern ‘omniscient’ force fighting the last war. By 2008, three letter acronyms (TLAs) unrecognizable to ‘even’ an equity salesman on Wall Street just a year or two prior were commonly overheard in gyms, taxis and coffee shops. Since then we’ve had TARP, multiple rounds of QE, operation twist, ZIRP, and if you’re ‘lucky’ enough to live in Europe, NIRP. The beginning of the reversal of these policies had the bond and equity markets screaming bloody murder by December 2018, enough so that the Fed is about to reverse course. Now the market waits with bated breath for a new round of Fed rate cuts, cessation of QT, and the contemplation of other ‘tools’ (cowbell) to push asset prices higher. Why do they think they can get away with this? Why do they think this will ‘solve’ for any problem? Specifically, because the specter of inflation hasn’t been spotted for decades. But more generally, because markets have been formed into political utilities. I highly recommend Epsilon Theory’s work on this topic.

But why do they think it will work? Central bankers only know how to fight the last battle, while pontificating not only that newly invented gadgets will work, but we know better than you, so back off. The GFC led to all sorts of models to explain, monitor and prevent new crises from emerging. And these are typically calibrated to solve for the types of specific problems that came about in the GFC that 11 years ago lead to massive asset price deflation. It’s amusing (but mostly terrifying) that the Fed thinks that right now their return to loose monetary policy is being proactive to the extent it will protect against a new crisis as opposed to being reactive, reactive in the sense the Germans ditched the horses and spiky helmets for trenches and machine guns after being mowed down. But the Central Bank plan is sadly misguided. How do a bunch of super Team Elite braniacs with massive resources and nearly unlimited power make such modelling errors?

In his excellent book “The End of Theory” Richard Bookstaber identifies 4 phenomena that lead to potentially catastrophic modelling errors:

 1) Emergent phenomena

o   Any number of independent actions cause catastrophic, unforseeable and novel events. Unintended consequences also create previously unseen crises. Think of people who act in a personally rationally manner in their frame of reference, but the sum of all the group actions results in chaos (people rushing to leave a burning theater).


2) Non-ergodicity

o   Probabilities and distributions of certain events are non-static over time. This is fundamental of both physics and picking up a gun and playing Russian roulette. Casinos would have a hard time doing business not only if the odds only changed every game, but if no one knew what they would be in advance (including the house). But much of our natural and social world is non-ergodic, yet we apply ergodic models to them.


3) Radical Uncertainty

o   This is what Rumsfeld famously characterized as “unknown unknowns”. Effectively, you have no way of knowing that you don’t know about the existence of certain phenomena. Newton didn’t know he didn’t know about the ‘existence’ of particle physics.


4) Computational Irreducibility

o   Economists (among others) assume that all phenomenon can be reduced to formulas and models that will predict future outcomes. We know this to be false across many natural and unnatural phenomenon, for instance the Three Body Problem.


Even simple systems involving a small number of interactions (human or otherwise) are typically irreducible. Consider the calculative permutations among hundreds of nations, thousands of companies or billions of people in a non-reducible subset!

We do understand that the above modelling errors ARE going to happen. We cannot erase non ergodicity in non-ergodic things for instance. We CAN acknowledge the nature of the model being applied versus the data set.

Decentralized Command

 In his legendary book “About Face” U.S. Army Col. David Hackworth at length describes the mechanisms of compounding errors due to centralized command during his time in the US Army in Vietnam.

“As a rule, the judgment of those on the ground was respected less and less in the post Korea years. Centralization of command, which had characterized the trench war of  ’52-’53, was alive and growing stronger every day. And it wasn’t just know-nothing commanders making the decisions (which would have been bad enough); now it was a combination of computers and peacetime procedures that ignored the human variables: initiative, potential and personal growth of an individual soldier” (Hackworth, 323)


The concept of decentralized command was his prescription (I am simplifying) for many of the policy and execution errors he saw the US military (and D.C.) making in Vietnam. The centralization of capital allocation through central bank policy is NOT the answer to winning the ‘war’ against deflation and anemic growth that so terrify central banks. The financialization of markets and zombification of corporations sounds a lot like the things identified by Hack (ignorance of initiative, potential and personal growth) within the U.S. military. Model errors will be present as long as we have data and models. Correct application of models, skepticism of ‘Big Data Solving’ and agent based models is the first step to avoiding these mistakes. What’s harder is we can only hope to attenuate the consequences of these errors by limiting the power and scope of those misusing models to form policy. But for now that (Prussian) horse has left the stable.

Of course all this makes the assumption that the Central Bankers are acting as independent and in good faith. A topic for later…


What is this blog?

This is a blog about financial markets, economics, people, history, politics and whatever else seems to make sense at the time.

I’m an asset manager, musician, father, husband and good at being well rounded. I am incredibly humbled by some of the thought leaders out there in so many different fields. My content won’t be as good as theirs. I’m okay with that as long as I can come out with something coherent and interesting.

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