Blogs | September 15, 2009

What sport teaches us about economics

The arrival of a football season is good news not just for fans but for economists.

Economists have been studying sports as a way of testing economic theories. This is because in sports, the objective – winning – is obvious, and results are clear.  Sports, more than the messy world of business, can tell us how people perform under competitive conditions. And the surprise is that they do badly.

What have economists' studies of sport found?
Professor Venkataraman Bhaskar of University College London calculated that, in one-day cricket internationals, teams that win the toss choose to bat first more often than they should, with the result that they fail to maximise their chances of winning. It's not just in cricket that teams fail to maximise their chances. David Romer of the University of California at Berkeley found something similar in American football.

Romer looked at the behaviour of NFL teams on fourth downs near their opponents' goal line. He found that teams were much more likely to choose to kick for a field goal than to try for a touchdown, even though doing the latter was likely to bring them more points on average. Teams do not maximise their winning chances, he inferred. Yet more evidence for this comes from German soccer.

Researchers at the University of Bonn found that, in the Bundesliga, teams that are a goal down often bring on attackers as substitutes, despite the fact that their best chance of equalising is in fact to leave their formation unchanged.

What if the coach got a red card?
You might object that all these errors are only temporary. As bad coaches get sacked and replaced by better ones, teams' systematic tactical errors should disappear. Don't bet on it. Bas ter Weel of the University of Maastricht has studied the effect of changing coaches in Dutch first division football between 1986 and 2004.

And he found that, apart from a boost in the first game under the new coach, teams' performance did not significantly improve.

In fact, the opposite is true: on average, teams do better if they stick with a coach during a bad run. This seems to vindicate Warren Buffett's famous quip – that when a boss with a good reputation joins a firm with a bad reputation, it is the firm that keeps its reputation.

How can this apply in business?
The implication of all this is devastating for conventional economics. Conventional economics tells us that competition breeds efficiency. Firms that face intense rivalry must maximise efficiency or go out of business, so competitive markets are the best way to ensure that the world's scarce resources are used most effectively.

However, the evidence from sports is that even fierce competition doesn't produce maximum efficiency. People, it seems, aren't the rational maximisers of textbook economics even when they have every incentive to be so.

There is, though, some good news here. There is now have a good excuse to stand around the water-cooler and discuss last night's game. It's not a waste of a firm's time (which, given that inefficiencies are inevitable, would be wasted anyway) – it's a chance to learn important things about how businesses work.


Chris Dillow
Chris Dillow

Investors Chronicle writer and economist