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Utilizing "The Zone" Phenomenon in Investing


How to maximize the rewards and limit the risks.

In basketball there's a motto: "Get the ball to the guy with the hot hand." The idea is that a team should take advantage of periods of time when a particular player is in a groove, or "in a zone". Under these conditions, the player with the "hot hand" should be enabled by coaches and teammates to shoot more often and even be given leeway to take "riskier" shots in order to take advantage of this particular and transient phenomenon.

The notion of "getting the ball to the guy with the hot hand" has many parallels in other sports. When a quarterback is in a groove, smart coaches will call pass plays more often and call plays that feature more complex and riskier routes.

In golf, players that feel like they are in a zone will often play more aggressively, going for longer distance on their drives and gunning straight for the pin.

In tennis, players that are "grooving" will often go for more aces and winners imparting greater velocity on their shots and trying to place the ball closer to the lines.

Highly successful players and coaches realize that it's productive to take slightly greater risks when a player is in a "zone". This insight takes into account three key facts:

First, occasionally players get on streaks where they are able to see and feel things better.

Second, under such circumstances, expected return per unit of normalized risk increases (because of the increased probability of success). In other words, overall team and/or personal performance increases by seeking higher rewards despite the apparently increased risk profile.

Third, being in a zone doesn't last forever. Use it or lose it; you need to take advantage of it while it is there.

All of this is easier said than done. Players and coaches often don't recognize or adequately take advantage of the occasions that a player is "zoning". In addition, individuals and teams run the risk of taking excessive risks beyond what's reasonable given the extent and nature of the "zone" the player is going through.

Finally, extending risk-taking behavior beyond the point where a player is no longer in a zone will produce counterproductive results. Thus, in basketball, field goal percentage will decline precipitously if a player starts taking "low percentage shots" after his zone has expired. In football, the number of interceptions and turnovers will increase. In golf, players start missing greens and fairways. And in tennis, players start serving too many double faults or hitting too many unforced errors.

Due to the difficulties of recognizing and managing the phenomenon of "zoning", some players and coaches play it safe and simply ignore this phenomenon. They play exactly the same way and take on the same amount of risk regardless of the phenomenon.

However understandable this may be, this isn't a recipe for achieving greatness. In sports, at a high level, players must be enabled to make great plays. And for players to be enabled to make great plays, substantial risks must be taken with the right players at the appropriate times.
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