Soccer and economics

My new book post is up on s+b's blog:

What the Beautiful Game Reveals about the Dismal Science

A lot of people watched the World Cup in Brazil this past month. The final numbers won’t be in for a while, but with record-breaking viewership for the first round of matches and a big bump in the U.S. audience, it’s a good bet that the 2014 Cup eclipsed the more than the 3.2 billion viewers (nearly half the people on earth) who tuned in at some point or another during the 64 matches in 2010. It’s also a good bet that Ignacio Palacios-Huerta, a professor at the London School of Economics and Political Science, is one of very few soccer fans who watched this year’s matches for insights into perverse incentives, market efficiency, and other economic concepts.

What can the beautiful game tell us about the dismal science? As Palacios-Huerta explains in Beautiful Game Theory: How Soccer Can Help Economics (Princeton University Press, 2014), soccer—and indeed many other professional sports—is a terrific laboratory for testing economic theories. “There is an abundance of readily available data, the goals of the participants are often uncomplicated (score, win, enforce the rules), and the outcomes are extremely clear,” he says. “There is an abundance of data, the goals are uncomplicated, and the outcomes are extremely clear.” 

Take incentives, for instance. We’re often warned that incentives can have unexpected consequences, but it’s tough to isolate the effects of an incentive—such as stock options, for instance—in the business world. Are senior executives neglecting the long-term well-being of their firms to bump up the value of their options in the short term, or is something else going on? Are managers sabotaging one another to boost their own performance in forced ranking systems or not? That’s tough to prove without a smoking gun, and managerial saboteurs tend not to leave that kind of evidence lying around.

For a more rigorous test, Palacios-Huerta and his colleague Luis Garicano examined the outcomes stemming from a 1994 FIFA rule change in which three points, instead of two, were awarded in round-robin tournaments for a win. (It was an attempt to drive up soccer scores and attract U.S. fans, who presumably find the subtleties of the game far less appealing than a Pelé-style bicycle kick into the net.) In doing so, the economists found empirical evidence for the risks attendant in strong incentive plans.

By analyzing the incidence of dirty play before and after the rule change, they discovered that increasing the points awarded for a win caused a rise in sabotage on the field: fouls and unsporting behavior resulting in yellow cards increased. By analyzing the results of matches, they further determined that the rule change did not change the number of goals scored. Teams played more aggressive offense until they got their first goal, then they hunkered down defensively to protect the win. “The beautiful game became a bit less beautiful,” concludes Palacios-Huerta.

In Beautiful Game Theory, Palacios-Huerta also reports on how he used soccer to prove the long-standing efficient-markets hypothesis—a theory suggesting that in the stock market, for instance, information is processed so efficiently that “unless one knew information that others did not know, no stock should be a better buy than any other.” The problem with proving this hypothesis is that you can’t stop time to analyze the effects of a piece of news on the market. But time does stop in a soccer match.

Palacios-Huerta realized that at halftime, “the playing clock stops but the betting clock continues.” So he identified matches in which a “cusp” goal was scored just before the halftime break, and then analyzed the changes in betting odds during the break at the Betfair online betting exchange. He found that Betfair lived up to its name: “Prices impound news so rapidly and completely that it is not possible to profit from any potential price drift over the halftime interval.”

This is good news for sports bettors, but it’s far less reassuring in light of the New York Times exposé that broke on May 31. It seems that some gamblers are allegedly paying off referees to use penalty calls to rig soccer matches. Efficient or not, when it comes to economic markets, it seems like somebody always knows something that no one else knows.

The ROI on mega sporting events isn't Olympian

My weekly book post on the s+b blogs wonders how Russia will benefit from hosting the Winter Olympics.

A Sucker’s Bet in Sochi

Truth be told, Olympic medal counts aren’t all that interesting anymore. Before the Cold War ended, medals were a leading indicator of global might: If one country’s hockey team beat another one’s hockey team, that meant the winner’s political and economic ideologies were righteous. But these days, it’s less about how many gold medals a nation wins and more about how many gold bars it spends. And hey, by that measure, Russia is back on top! The Winter Olympics in Sochi are the most expensive in history, reportedly costing US$51 billion—more than every other Winter Olympics Games combined.

That’s impressive, and so are some of the stories that have dug into the breathtaking scale of “waste and corruption” at Sochi, like Joshua Yaffa’s cover story in Businessweek. But countries and cities have been going on Olympic-sized spending sprees to land mega sporting events for a long time. The perennial question remains: Is it worth it? For the answer, I turned to the International Handbook on the Economics of Mega Sporting Events (Edward Elgar Publishing, 2012), edited by professors Wolfgang Maennig (an Olympic rowing champion himself) and Andrew Zimbalist, and reissued in paperback in December 2013.

I can’t follow all the economic analysis in this book, mainly because the use of letters and other non-numeric symbols in the equations marks the border of my mathematical nether regions. But the conclusions of the impressively credentialed group of academicians and researchers who contributed to the thick—and rather daunting—collection are clear: “Most studies have found no statistically significant economic effect from hosting [the Olympics and other mega sporting events] and a few have found a negative effect”...read the rest here