Behavioural Finance

Carter Racing Case Submission

Submitted to:
Prof. Mayank Joshipura

Submitted By:
Group 8

Utkarsh Shukla A055

Anoop Solanki A059
Prakshi Thareja E060
Aashi Singhal C057
Shubham Singh D054
Aarsh Sanghrajka G053

Q1. Are you with Pat or Robin? Why?

Pat Edwards has suggested that the engine failures are due to ambient air temperatures causing a
differential in rates of expansion causing the gaskets to fail. He has based this claim on his gut feeling
and he does not have anything else to back his claim. On the other hand, Robin Burns has compiled
data of the previous engine failures, which clearly reflects gasket failures over a range of
temperatures. This data supports his theory of temperature not being a culprit. We as group believe
support Robin Burn as he has data to back his claims. However, it should be noted that seven
observations are not enough to establish or reject correlations or causations. The team should
gather further data in this regard.

Q2 Which are the important non-financial aspects for BJ to consider before deciding on “Race or
not to Race?”

Gambler's fallacy:

This non-financial behavioural aspect means that an individual erroneously believes that the onset of
a certain random event is less likely to happen following an event or a series of events.

Even in our case, Robin believed that race can be won by believing in probability since they have
finished 62.5% of races and when they finished, they were top 80% of the time. And he believed
that due to this reason they might win this race too.

This is a classic error one does under Gambler’s Fallacy

Dunning Kruger effect:

The dunning kruger effect states that there is a tendency that people with low ability at a task
overestimate their ability.

In this we could see, despite data showing that engine failure has no relation with temperature Pat
wanted to stick to temperature. He considered his experience above the data that was put in front.

Confirmation bias:

This bias state that oftentimes people hold onto their first impression that most likely support their
idea and ignore the rest of the information that might contradict them.

This can be seen when Pat was only looking at the temperature to evaluate if they should race or
not since it wasn't contradicting his opinion whereas overlooked the information available regarding
the pressure till the last.

Overconfidence and Anchoring:

The car's engine had failed 7 times in 24 outings this season with various damage to the car and
engine. However, no one was aware about the accurate reasons for the same. But since the engine
had failed for 7 times already, this provided an anchor to BJ and Chris to believe that this might
happen again if they decide to run this race. Even though they had stats provided by Robin which
showed no correlation between temperature and engine performance, they were still sceptical
about the same because of the past happenings and Pat’s gut feelings and his overconfidence about
his theory of a relation between temperature and engine performance
Q.3. Use Decision tree/related approach to capture all available (quantitative) information and
give your decision on “Race or not to Race?”

Q4.  Anything else that you want to add.

After making the decision tree we have arrived at the conclusion to race.
Although if they lose this race, they will lose the tyre sponsorship and the oil contract worth
$800,000 and then they’ll have to look for a new oil sponsorship and won’t be able to race without
the oil contract.

We also need to look at other data points:

1. Pressure data point
2. Relation of Pressure Vs Temperature
3. Lubrication data and properties
4. Look into the static and fluid analysis as it plays a key role in Gasket life