Economic Theories

Part 22 – Public Choice Theory

It’s quite probable that when James M Buchanan Jnr created is Public Choice Theory he didn’t expect to win a Nobel Prize. But that’s what he did. He probably also didn’t think it would be used to explain why certain players strike up natural partnerships with each other that delivers significant benefits for their club.

Buchanan was almost certainly a fan of the great Rapid Vienna side of the early Eighties who won back to back Austrian Bundesliga titles whilst he was teaching at the Austrian School of Economics. They won the1982-83 title on goal difference from city rivals Austria Vienna thanks in no part to the goal-scoring partnership of Hans Krankl and Antonín Panenka. Krankl was a goal-scoring legend for the club, scoring 267 goals in 350 games but he rarely found a striking partner who he worked well with. Enter Czechoslovakian Panenka in 1981 and the rest is history and he averaged a goal every other game in his four years at the club.

So what’s a Nobel-winning Economic theory got to do with the scoring exploits of Krankl and Panenka? Good question to ask and one that Buchanan could have taken to his grave if it wasn’t for his study, Buchanan lays out his award-winning theory in a book he co-authored with Gordon Tullock called, “The Calculus of Consent: Logical Foundations of Constitutional Democracy.”

Buchanan brought together insights from political science and economics to explain how public-sector individuals, such as politicians and civil servants make decisions. He showed that, contrary to the conventional wisdom that the public-sector acts in the public’s best interest, unless there is a clear win-win situation. In footballing terms, players, especially strikers, are inherently selfish, wanting all the glory for themselves.

However, once in a while a club will stumble of a partnership where both players work in unison, understanding that the sum of the two talents is greater than their individual efforts and thus debunking Buchanan’s work. Shearer and Sutton, Sheringham and Cole, Cottee and McAvennie and now Smith and Okoh for the mighty Rooks have proved that mutual interest is stronger than self-interest.

Since our dynamic duo were paired together against Sittingbourne, they’ve scored six between them, of which five have been laid on by each other. Last weekend’s opening goal against Godalming Town was a classic example with Jonté Smith holding the ball up and drawing defenders to him before playing Stephen into space behind the defence to slot home. For us Rooks fans the partnership is getting better game by game although would have had Buchanan tutting into his Apple Strudl. He would have enjoyed Okoh’s solo effort in Guernsey though where he appeared to take on the whole Guernsey side without a care in the world for the Rooks players (including Jonté himself) in support before curling it home.

So next time you see a player decide he’s going go it alone and ignore his team mates in better positions rest assured it’s not through self-interest but rather conforming to a Nobel-prize winning theory.

Part 21 – The Kaldor-Hicks Theorm

It doesn’t matter what the decision is, someone somewhere will be worse off.  It doesn’t matter if it’s a political decision, an economic decision or a referee’s decision, there will be winners and losers.  In theory there could be a decision made that benefits everyone and penalises nobody, called the Pareto Improvement, but that’s hardly like to happen – everyone could be given free entry to football if the clubs were compensated but somewhere along the line someone will have to pay, for instance by increasing the subscription fees to watch games on TV, or a decision to lower the cost of a replica shirt will impact margins somewhere and cause pain to a manufacturer or the work force employed to make it.

I’ve no idea if Nicholas Kaldor and John Hicks were football fans or even if they were thinking about the beautiful game when came up with a theory that determined for every decision that was seen as positive in some people’s eyes, there would be a group of people who would be made worse off in some way (economical or socially) but their criteria to determine whether a decision is as holistically beneficial can be applied to virtually every decision we, or any club makes.

For instance, in the summer we made the decision to reduce our admission prices by £1 for Adults and Concessions.  Everyone benefited right?  The fans had an extra £1 in their pockets which they could potentially spend elsewhere in the club for sure but the club loses out.  We are pretty sure that it isn’t price that impacts our attendances rather than whether Brighton & Hove Albion are at home, and most importantly how we are playing.

If we continue to play as we are then we could probably increase admission back to £11 and £6 and there will be no material impact on the crowd.  Our fans want to see winning football and our pricing strategy does not inhibit attendances.  Last season we averaged 413 at this stage of the season, this season 409.  So we’ve dropped down a division and reduced prices by £1 but no more fans are coming through the gate.  BUT if we look at our attendances since our mid-September turnaround happened and we started playing better, we are actually averaging 440, nearly 10% up on last year.

The obvious loser in the decision to reduce admission charges is the club.  Our costs have either increased or at best stayed the same.  Our playing budget is still £2k per week.   We play 23 home league games in the season, which works out at £3,200 in costs per home game.  If our average attendance falls, as it has so far, despite admission being reduced then we have a hole to fill.  Taking the facts as red and assuming we have 300 paying fans each home game, we are £300 down per game or almost £7k down on the season.  We could try and sell 152 additional programmes per game to make up the deficit or simply suck it up (which we’ve done).

I remember seeing one side a few years ago try to introduce a variable pricing strategy based on league position with four check points in the season.  So they set the pricing at the start of the season, then reviewed after circa 10, 20 and 30 games.  The concept was that the better the team were doing, the lower the admission was.

However, this is economically wrong.  Let me demonstrate:-

If the average admission paid per spectator at the start of the season is £10 and the average attendance is 1,000 then match day ticket revenue is £10,000.

After 10 games the club are having a shocker and fall to the bottom of the league.  The club can’t justify changing admission prices despite average attendances dropping to 900, thus match day ticket revenue is £9,000.

After 20 games they’ve changed their manager and have improved, sitting just outside the playoffs.  The club drops ticket prices by 10%.  Average attendances rise back to 1,000.  Match day ticket revenue is still £9,000 (£9 x 1,000)

After 30 games they are challenging for the title and the club drops pricing down for the final home games to £8 to bring the fans in.  Attendances go up to 1,200 so match day revenue is now £9,600, which is less that they were getting when they were bottom of the league. The total season revenue for 40 games is £376,000.

Of course the more fans attend games, the more they will spend in the ground but even so, the theory above shows that it is flawed.

If instead the club would have reversed their strategy, it would have looked like this:-

Game 1 – £10 admission, 1,000 average attendance = £10,000 match day revenue

Game 11 – £8 admission as they are bottom of the leave, 900 average attendance = £7,200 revenue

Game 21 – £10 admission, 900 average admission = £9,000 match day revenue

Game 31 – £12 admission, 1,200 average admission = £14,400 match day revenue

Total match day revenue is £406,000 or 8% more than the strategy most clubs would employ.

According to Kaldor and Hicks, whilst the economic rationale behind a decision to lower pricing when the team was doing well was sound, it actually makes no economic sense.

The decision by the Premier League and the member clubs to cap ticket prices at £30 for away fans is another example of the Kaldor-Hicks Theorem in practice.  Whilst the decision will benefit the travelling fans, the clubs themselves will see a reduction in revenues unless they raise ticket prices for home fans.  Hopefully, the huge sums of money the clubs now receive from the new TV deal will more than compensate them – in fact they could still afford to reduce pricing comparably for home and away fans, although let’s face it, that’s hardly likely to happen is it?

Part 20 – The Paradox of choice

In 2004 American psychologist and Philadelphia Union fan Barry Schwartz published his book called The Paradox of Choice – Why More is Less where he argued that eliminating consumer choices was actually a good thing as it greatly reduced anxiety for consumers.

“Autonomy and Freedom of choice are critical to our well-being, and choice is critical to freedom and autonomy. Nonetheless, consumers today have more choice than any group of people ever has before, and thus, presumably, more freedom and autonomy, we don’t seem to be benefiting from it psychologically.“  Barry argued.  Whilst his text made references to consumers throughout the book, it is clear that deep down he was actually basing his research on the spiralling transfer market.

Schwartz espoused the concept of voluntary simplicity, where we only have a small number of choices in life and immediately you can see he is referring to the majority of Non-League football clubs, who simply do not have the resources to be able to pick and choose the players they want.  We often refer to this as Hobson’s Choice, named after the Oxford United Chairman who found himself with no candidates when he advertised for the manager’s role a few year’s ago.

The concept of the Transfer Window in the world-wide professional game was supposed to reduce the stress and burden on clubs but all that it has done is concentrate the wheeler-dealings into two small windows.  Clubs struggling in the first half of the season put all of their hopes in the January Transfer Window but are often frustrated by rising prices because the selling clubs know they are desperate based on their league position.  The Paradox of Choice is seen in full effect where there are often far too many options but too few genuine choices.  Unless a club is prepared they simply will not be able to see the wood for the trees.

Schwartz’ research found that when people are faced with having to choose one option, or player out of many desirable options, they will naturally consider the trade-offs mentally before making their decision and they will think in terms of the value of the missed opportunities rather than the value the potential choice will bring.

Every week Darren has to make a choice between putting a substitute keeper on the bench or an outfield player.  It has been over a year since we have needed to use a sub keeper, although those who saw the game at Canvey Island last year would have prayed we had on that day and it is therefore a fair decision to put five outfield players on the bench each week.  If we only had a squad of 16 players then he wouldn’t have to make that difficult decision – it’s not like he has to play everyone on the bench.  So perhaps the Paradox of Choice would make his job a little less stressful come match day.

Schwarz’s theory has been debunked by a number of further studies, suggesting the complete opposite, that more choices make people happier.  But if you knew the back story about his research you’d understand it was all about football anyway.

Part 19 -Giving before receiving

The term “fallen giant” seems to be one exclusively used by the Footballing world. Our top four divisions are littered with them.  Leeds United, Newcastle United, Portsmouth, Blackburn Rovers, Fulham, Wolves, Aston Villa, Nottingham Forest, Bolton Wanderers, Charlton Athletic.  At points in the last couple of decades you could have included Manchester City, Chelsea, and even Premier League champions Leicester City on the list.

The definition of fallen giant seems to be any club that’s ever won a major honour, has a decent fan base and big stadium, that has through chronic MIS-management found themselves sliding down the leagues.  The Championship is so full of fallen giants that it’s hard not to have at least one game a weekend without the media referring to one side as such.

How much sympathy should we have for them though?  In his book Money and Football, Stefan Szymanaki examines the failure of ITV Digital at the turn of the century and the impact that had on Football League clubs.

The original deal, signed by OnDigital in June 2000 would see £315 million flow into the pockets of the 72 Football League clubs over a three year period from June 2001.  Despite the fact they didn’t have any of the cash yet, during the summer of 2000, spending on players by the Championship clubs was up by 36% year on year.  Twelve months later just before the first payments were due to kick in, they had increased that amount by a further 24%.  Eight months into the TV deal, ITV Digital went bust.

Many clubs then threw their hands up claiming financial distress because of the collapse of ITV Digital but in reality they had spent their pocket money increase before they’d received it.  In other walks of life we’d be more prudent – we’d not agree to buy a book before it was written, buy a car before we’d at least seen a review (I will conveniently ignore property at this point) or buy a ticket to see a film before production has even started.  Football, it seems, is the home of financial imprudence.

That being said, football does have a Teflon coating.  In 1923 the Football League consisted of 88 teams. Ninety years later 85 of those teams were still in existence, albeit it some had changed name.  Compare that to an average High Street over the same period.  How many businesses that existed back in 1923 still exist today?  Think about industry verticals such as airlines.  Twenty years ago the sky was dominated by Pan-Am, Danair and Pacific South-West.  All three have gone to that great airplane graveyard in Arizona (yes, that is a real place). Banking – how about Lehman’s, Barings, Northern Rock?  Even the British High Street has not been immune with Woolworths, Blockbuster, Jessops, Tie Rack and now British Home Stores disappearing. These are businesses that have failed, yet a little-old football club, like Lewes, that ducks and dives for over a century seems to be made of Teflon.

Why? Because we’ve learnt to adapt, we’ve learnt to cut our cloth according to our needs and we’ve learnt the painful lesson of spending that pocket money before we had it and vowed never to do it again.  There’s also more emotional engagement with a football club than a High Street brand.  When Woolworth disappeared we may have lamented the fact that we bought our first record there or we could always sneak a few extra sweets in the pick and mix, but we found other shops to satisfy our musical and sweet tooth needs.  Football clubs represent communities and have emotional attachments.  People have far more invested than simply money.  So individuals will often throw bad money after good (and vice versa) to keep a club alive.

The community-ownership model is slowly becoming the model of choice for clubs who have suffered the financial distress of administration or winding up orders.  I cannot guarantee a successful future but it does mean more of a stress-free one.

Part 18 The Recourse Plan

The resource curse, also known as the paradox of plenty refers in footballing terms to the situation that exists at the highest level of the professional game where the clubs have such an abundance of players that they do not know what to do with them. It is a theory that is significantly harder to find in the Non-League game, although there are classic examples.

The idea that having too many resources might be more of an economic curse than a blessing was first floated by Arbroath fan Richard Auty in the mid-1990s after seeing the Rangers win nine consecutive Scottish Premier League titles. He saw that despite all of the resources at hand both on and off the pitch, rivals Celtic simply couldn’t break Rangers grip on the dominance in the domestic game. His theory on the Resource Curse has since been used to explain how clubs such as Manchester City, Leeds United, Southampton and current Premier League Champions, Leicester City dropped like a stone down the leagues before they realised it wasn’t all about hoarding the most expense resources being wasted through unused.

A study by Lincoln Moorland Railways fans Jeffrey Sachs and Andrew Warner concluded that there was a strong correlation between a plethora of natural resources and poor economic growth. Whilst their work may have on the outside focused on some countries in Africa where precious metals were being mined yet economic indicators suggest that they are some of the poorest countries in the world, they also could have been talking about Chelsea’s 2015/16 season.

The Blues were the envy of many at the start of last season. Premier League champions a few months earlier delivered by The Special One and over £68 million worth of new signings to join in the training sessions at the state of the art facilities in Cobham. As well as the 32 man First Team Squad, the club had a further 30-odd players out on loan during the season. They had some of the biggest and best resources in world football yet there are few who saw them lose 9 of their first 16 games and exit from the Champions League in the first knock-out stage. Mourinho paid with his job, whilst the rest of English football rolled around on the floor in laughter. That is the Recourse Curse in full effect – despite an endless stream of Russian Roubles, they couldn’t convert them into success on the field.

And that, ladies and gentlemen is why you could have all the best youngsters in the world, the best training facilities in the land and arguably the best manager yet you still find yourself kidding yourself that it is “all about the Europa League” or even that this is a season of “consolidation’. The Resource Curse is alive and kicking in English football, and one that will get stronger and stronger as each billion pound TV deal season passes.

Part 17 – Endogenous Theory

In the seventh of his deep-thinking articles, our in house Economist Stuart Fuller tries to explain famous Economic theories by using football as the model. Today, he explains why we don’t need any outside investment at Lewes FC to be successful in the long-term….probably.

It’s been a long-held belief that growth of any business or economy is reliant on exogenous, or external, factors such as cash or government policy. Endogenous growth theory holds that investment in human capital (players), innovation (new training methods), and knowledge (player analysis) are actually significantly bigger contributors to economic growth than influxes of external investment (TV money). The theory also focuses on positive externalities (positive performances by our national sides) and spill-over effects of a knowledge-based economy (social media) which will lead to economic development.

Not convinced? OK, let’s look at two examples from last season. Leicester City certainly weren’t the biggest spenders in pre-season, nor did they have the “best” manager. Yet they ended up winning the Premier League. Why? Partly because the biggest challengers went into meltdown but also because they invested internally into player recruitment, new training methods and avoided injuries and suspensions to key players. As the season progressed, the squad believed that they could upset the 5000/1 odds on winning their first ever Premier League. With a manager at the helm who knew example how to get the best out of the squad, without resorting to upsetting the balance in the squad by spending money, they epitomised the theory of endogenous growth perfectly.

Closer to home we all admired the superb season that Bognor Regis Town had, reaching the Play-offs and the semi-finals of the FA Trophy where they narrowly lost to Grimsby Town. They played more games last season than any other Ryman League side, yet only used 26 players in the process. Granted, that requires some serious luck with injuries but it also reflects on the skill of their manager, Jamie Howell, in knowing how to cut his cloth according to the budget he was given at the start of the season. Whilst they would have earnt around £35,000 in prize money from their run in the FA Trophy, the timing of that cash would have not allowed Jamie to spend much of it, thus relying on the internal investment to carry his team forward.

Football today is awash with cash at the top level, especially now that the TV deals have been renegotiated. At the level Lewes play at we will see little of that cash and so it is up to us to generate our own revenues, not relying on someone else to “bail us out”. And that, ladies and gentlemen, is The Theory of Endogenous Growth in a nutshell – success comes from within rather than with the help of external investment.

Part 16 – The Moral Hazard Theory

In the 2014 film The Big Short, the real reasons behind the start of the Global Economic Crisis were explored. To many of us, the years between 2007 and 2010 saw unprecedented financial pressure, driven by trusted establishments as well as our own need to budget based on our circumstances. Few people really understood how our boom had suddenly been the biggest bust in history, so the film aimed to explain what really happened, using examples such as chefs making fish stew or actress Selena Gomez playing poker to explain some of the more complex terms such as synthetic derivatives and the concept of sub-prime lending. Whilst these were good examples that helped us understand, it would have been much better if they would have used an example relating to the beautiful game.

Moral Hazard not Micky Hazard (Thanks to Oldschoolpanini.com)

Moral Hazard not Micky Hazard

The basic premise of the film and the core compelling event behind the Global Economic Crisis was that of Moral Hazard. The theory of the Moral Hazard is originally attributed by some back to the 17th century, but economists Allard Dembe and Leslie Boden created the current theory when trying to explain the situation of Winston Bogarde wasting away in Chelsea’s reserves*, happy to do the bare contractual minimum to earn his substantial weekly wage. The Moral Hazard Theory related to a situation where the behaviour of one person or party may change to the detriment of another after a transaction or contract has been completed. Insurance policies are a more conventional example where the insured party may take more risks knowing that there’s a financial safety net should things go wrong. But how did Dembe and Boden apply the theory to Non-League football?

For example, let’s say a Non-League club signs a promising centre forward on a year’s contract. The day after the ink dries on the contract the player damages his knee in a non-football related incident (such as falling off a table whilst dancing in a Crawley nightclub, drunk at 2am) but hides the injury until the first pre-season training session where he goes down in real pain after an innocuous challenge in the first minute of the practice game. The injury keeps the player out for the rest of the season. The club would be liable to continue to pay his wages despite having no liability in terms of the injury because the player’s behaviour changed once the security of the contract had been completed. Would he have still claimed he was injured in pre-season training if he wasn’t under contract? Probably not.

The reason why is that the Moral Hazard Theory works under the premise of information asymmetry, in other words where one party in the transaction having more information and acts or behaves inappropriately than the other party, normally the one who has to pay the consequences of the risk, which in the above example is the player knowing about his injury but not revealing it to the club.

So that is the Moral Theory and how it influences our thinking today and in the future.

*Probably

Part 15 – Disruptive Influencers

Back in 1997 DC United won the second ever MLS Cup, beating Colorado Rapids on home turf. Avid fan and Harvard Business School professor Clayton Christensen was so compelled by DC United retaining their title that he sat down and and mused as to whether this could be the start of something beautiful for his side and US Soccer in general. Looking across the pond at the dominance of Manchester United plus the emergence of the Galacticos in Madrid he wondered if a new force could emerge to take world football by storm. His theory on disruption theory has been called “one of the sexiest theories ever written” by The Lady magazine, high praise indeed and has since been adapted for wider economic models, but it should always be remembered that it’s humble beginnings were in the beautiful game. So what’s all the fuss about?

Christensen’s theory is based around the principle that innovators with cheap solutions to a vexing market problem can unseat larger, more established rivals. So in the case of DC United’s squad, assembled at a fraction of the cost of United’s or Real’s, could their domestic dominance and momentum carry them across the pond and further in the global game. His theory was hailed as the answer to everything from making health care more efficient to reducing poverty by some of the world’s greatest thinkers, and Elton Welsby, and was the talk of the dressing and boardrooms from Rio to Rome.

Christensen wrote that disruptive innovations, such as Social Media websites, Rainbow looms and snoods tend to be produced by outsiders from their industry. The business environment of market leaders does not allow them to pursue disruption when they first arise, because they are not profitable enough at first and because their development can take scarce resources away from sustaining innovations (which are needed to compete against current competition). So when FC United won their first MLS Cup back in 1996, nobody outside of North America took them seriously – it was after all a small domestic league of ageing imports and unproven domestic talent. But back to back wins, and two more final appearances in the next two seasons allowed them to pursue that disruption and potentially start eat the global giants breakfast.

Alas, DC United’s dominance didn’t last as long as Facebook although it did outlive the crazes of plastic bracelets made by our kids and neck scarves worn by hardy professional footballers. Christensen’s theory was debunked by some who pointed to Apple’s continued dominance in the device market, or Amazon’s in terms of online shopping. We’ve seen pretenders to the footballing global dominance throne very occasionally come forward but money talks in today’s game. There is no coincidence that the clubs with the deepest pockets in England, France, Holland, Spain, Germany and Italy walk away with the honours year after year. Despite salary caps, centralised contracts and no meritocracy structure, the US domestic game is no different today. The LA Galaxy have won three of the last four titles whilst the New York Red Bulls, with the backing of the global energy drink company, lead the way this season.

Christensen’s five minutes of fame may still resonate with some economic thinkers but in terms of the world of football it’s the same old story – money talks.

Part 14 – The Doom Cycle

In the last year I have written a number of articles trying to explain some common Economic Theories using football as a reference point.  Up until now they have all been hypothetical but today there is a real link between the theory and the reality that Lewes are currently experiencing.

The “Doom Cycle” is a phrase often used to refer to the current boom-bust-bailout structure of the financial sector that leads to economic crises.  The pain of the last few years is still too real for many people to have forgotten.  The Doom Cycle has been defined by The New York Times as: “a virtueless circle in which banks take ever-greater risks to boost returns”

In footballing terms, it means trying every possible variable to try and break a cycle of bad results.  Just like Lewes’s current run which has seen us exit all four cups and take just one point from the last fourteen Ryman Premier League games.  I think you could say that was a bad run of form.  Yet within that sequence there have been many positives.  Alas, football is a cruel game and failure to take chances when presented, or convert possession into something meaningful.  The virtueless circle where you try anything different, whether than is a formation, personnel, preparation or set pieces to find a win.  It is fair to say that you get to a point somewhere along the line where you will take any win, irrespective of how it comes.

“You can’t buy any luck when you are at the bottom” said someone to me at a League meeting last week.  Every club has sympathy with teams at the bottom (well, at least to your face), saying platitudes such as “your luck will turn” or “It will turn out alright”.  To those 23 other teams in our league they will hope we stay down at the bottom – after all it is one less position for them to worry out.  Last week at East Thurrock we felt the full effect of fate – three players ending up in hospital, one of which with a long-term injury just days after signing a contract plus a sending off that embarrassed the basic rule of refereeing about being impartial and not influenced by the actions of the teams.

CaptureAs results continue to be poor, crowd numbers fall.  Football fans are either unconditionally loyal (circa 20% of the fan base) or are results driven (70%) with 10% sitting somewhere in between.  When times are good, the crowds come and watch and spend money in the ground.  When scores go against you, those results-driven fans decide to spend their time and money elsewhere on a Saturday afternoon.  That is totally understandable.  Alas, when budgets are set at the start of the season you do not factor in being bottom of the league – you set realistic targets for average gate revenue and yield per spectator.  You can’t factor in those 2 or 3 big games that provide some extra insurance being postponed or being moved.  Today we were supposed to be welcoming Dulwich Hamlet and their army of beer-thirsty fans.  Instead they are in FA Trophy action.  With no disrespect to Leiston, but their dozen or so fans will not make up for the hundred or so from Dulwich.

So as results decline, so do the crowds and match day revenue.  To keep a balanced budget that means having to cut spending in other areas, which potentially impacts the performance of the team even further.  And so on – the club enters a Doom Cycle or a virtueless circle of short-term decline.  I think we have dispelled the myth now that the answer to any problem is to “increase the budget”.  Most fans understand that we are not in a position to do that.  We have our cloth, cut to size and we have to wear it.

Some fans have questioned the commitment and focus of the club, even suggesting that there is foul play at work on the board in how we manage the club’s finances.  It’s tough to have the answer the same questions time and time again, especially those around the budget.  There is no secret fund, piggy bag or plastic bag full of cash.  Sure, we could take money from elsewhere – not paying our electricity bill or income tax, but we’ve been there, done that.  Still some think that the responsibility of the individual board members is to constantly put their hand in their pocket.

The game would also see the launch of our new 12th Man scheme – a different approach to adding to the first team budget.  Launched at 12:12pm on the 12th of the 12th (clever, eh?) the concept has been used with some success elsewhere but even this initiative was scorned upon by some fans on Social Media – suggesting that the move was an admission of failure and neglect from the board for not putting in money the club didn’t have into the budget. Sometimes I truly wonder whether the stress is really worth it.

Part 13 – The Theory of Sabermetrics

MoneyballFor those who have seen the film Money Ball or read Michael Lewis’s book of the same name, you will be familiar with the name Bill James. For those who don’t know about the remarkable story of the Oakland Athletic baseball team then I thoroughly recommend seeing the film or picking up the book.  Without spoiling too much of the plot, James is a much-maligned chap who came up with a statistical system that was able to be used to rank each attribute of a player and thus whether they could do a job for a particular team.  He coined the phrase Sabermetrics and defined it as “the search for objective knowledge about baseball.”
Sabermetrics attempts to answer objective questions about baseball, such as “which player on the New York Yankees contributed the most to the team’s offense?” or “How many home runs will a particular players hit next year?” It cannot deal with the subjective judgments which are also important to the game, such as “Who is your favourite player?” or “That was a great match”

The General Manager of the Oakland A’s, Billy Beane, adopted the concept and took his team on an amazing run which then resulted in an approach from Boston Red Sox owner John Henry. Yep, the same John Henry who today owns Liverpool FC.

Why is this relevant to the beautiful game? In recent weeks a remarkable story has broken about Brentford’s manager Mark Warburton announcing he will step down at the end of the season. Brentford are currently playing at the highest level in their history, they have a real shot at promotion to the Premier League and a long overdue move to a new stadium is finally on the cards. So why is Mark Warburton stepping down?

The reason is the direction self-made millionaire and club owner Matthew Benham wants to take the club.  Benham made his cash pile in betting, managing a hedge fund to be more precise before turning his hand to the world of sports spread betting. He employed a team of people to analyse every statistic about clubs and players, and used the results to predict results. Based on his wealth who is to question the success of this approach? The next logical step is to apply the model to his own clubs. Clubs plural as he purchased FC Midtyjlland in Denmark last year. The club, who had have never won a major honour are currently top the Danish SuperLiga using his model.

Will this model work for Brentford? FC Midtyjlland’s chairman, appointed by Benham, 31 year old entrepreneur Rasmus Ankersen thinks there is a 42.3% chance of Brentford gaining promotion to the Premier League based on the data they have collected rather than looking at current form and making a reasoned guess of yes or no. And that, ladies and gentlemen is the theory of Sabermetrics – using past performance and data trend analysis to make decisions about the future.

Part 12 – The Theory of Chaos Theory

Most economic theory is modelled on the laws of motion developed in the 17th century under the ideology that for every action there is an outcome.  The recent TV deal agreed by the Premier League is a great example of this.  The action? Sky and BT paying an eye-watering £5.14 billion for the rights to show live football.  The outcome? An increase in subscription costs to fund this investment, resulting in more fans turning to illegal, free web streams.  The action? Putting out a weakened team in the FA Cup? The outcome? A humiliating thrashing. The action? A player is sent off. The outcome? Team now plays against one less man, giving them a numerical advantage.

If the footballing world does indeed always behave like this then why do we find it so hard to correctly predict what will happen in games when certain actions occur? Austrian economist and avid SC Weiner Neustadt fan Friedrich Hayek believed that economics and football were far too complex to model in this way, building on the work of his nemesis, the big Zulte Waragem fan Ilya Prigogine who had declared at half-time in the derby versus FC Kortrijk in 2001 that predictable, regular actions by players does not necessarily lead to a predictable result for the team.  Whilst you can shoot every time you get the ball, there is no guarantee that you will win, or even score he mused over his half time pie.

14898233309_615b6cc306_zThe reason for all this hot air is described in the famous Butterfly Effect, coined by Tampa Bay Rowdies season ticket holder Edward Lorenz back in 1960.  He suggested that a butterfly flapping its wings in Brazil could lead to a cyclone in Texas.  His theory into chaos often comes from the chain reaction of tiny effects weren’t observed as people think from his study of meteorology, but from watching his side in the NASL and how a bad back pass had resulted in a goal against the run of play and ultimately costing the Rowdies a win and the league title.  That in turn led to the sacking of their manager, who went on to manage local rivals, Fort Lauderdale, to the NASL title – all of which can be traced back to one back pass. Thirty years later we saw the theory in action again in Rotterdam when Ronald Koeman pulled down David Platt in a game between Netherlands and England. Koeman should have been sent off. He wasn’t and he then went and scored a decisive goal at the other end that ended England’s hopes of qualifying for the 1994 World Cup and thus Graham Taylor lost his job. Oh, and the phrase “Do I not like that”.

Football is unpredictable.  The same team, playing in the same formation against the same opposition two games in a row will perform differently due to external factors such as the pitch, the weather and the referee.  That’s what makes the game so beautifully unpredictable and complex.  And that, ladies and gentlemen is the basis of the theory of Complexity and Chaos.

Part 11 – The Theory of Return on Investment

The news that the new £5.14 billion Premier League television deal hasn’t exactly gone down well in many quarters.  The winning bids represent huge investments made by the media giants, with the Premier League now undoubtably the richest league in the world.  Arsenal manager, Arsene Wenger commented that the TV deal, and the huge influx of cash that will flow to the twenty clubs will allow them to attract the best players in the world.  Everyone’s a winner right?

14327363682_aef7b6c31b_kBut both Sky and BT will need to recoup their investments, and that is likely to spell bad news for subscribers. Rival TV boss, Tom Mockridge of Virgin Media, told ITV News this week that fans who already pay the highest prices in Europe to watch live football as from 2016 prices will see further price rises.  Faced with increasing subscription costs, some fans will abandon their contracts and look at alternative ways to watch their football.

So whilst pubs and clubs may now see more fans coming through their doors to watch games thus increasing their profits, there is a real danger that the number of websites that provide links to illegal streams will increase significantly. The more people that choose to use these streams, the more the broadcasters will be forced to increase subscription costs to recoup their investments. On the other hand, any proactive measures they take to try to identify and remove these illegal streams incur costs too – it is a real catch 22 situation.

So whilst many football fans may bemoan any potential price rises, it is important to understand the impact these illegal streams have on the the genuine product.  Just like any in-demand or aspirational product, counterfeiters and IP infringers will look to satisfy low (or no) cost demand.  The end product in the case of watching streaming sites is often poor quality, whilst downloading any software associated with these sites brings its own set of dangers. The very fans who abandon their subscriptions because of the cost in favour of illegal streams are actually part of the problem rather than the solution. That is the theory of return on investment.

Part 10 – The Theory of Value

Back in 1261 whilst waiting for the medieval equivalent of Super Sunday to start Thomas Aquinas picked up his quill and started to draft the first ever transfer policy for his as-yet unnamed football team. He had studied the way that his local market worked and mused that “no man should sell a thing to another man for more than it’s worth”. In that one statement he tried to explain the collective transfer value of Andy Carroll.

4766163428_f4f73b243f_bAccording to prevailing economic theory, there is no such thing as a rip-off or something being over-priced. The price of anything is simply the market – if someone is prepared to pay then it is a fair, market price AS LONG AS there are alternatives (monopolies such as train companies do not adhere to such a model of course). So if someone wants to pay £25million for a route-one target man with a dodgy knee and an even dodgier ponytail then it is a fair price. Nobody forces a football club to buy any player – they have three choices. Try to negotiate a lower price perhaps throwing in a few players who aren’t good enough for them, spend the cash on something else such as a new fleet of Bentleys for the existing player or go and buy an alternatively crocked player with a bad haircut elsewhere.

The transfer market should establish a fair price for every player as no one has an intrinsic value. So they may have played for their country a hundred times, scored the winner in a World Cup Final, kick with both feet and can head the ball fifty yards – all great characteristics but irrelevant if you are looking for a goalkeeper. Clubs who slap a price tag on a player are trying to create a false economy that will never prevail.

Aquinas suggested the concept of a “just price” – the price the buyer is willing to pay with the right amount of knowledge of the product. So if a club knows Carroll has a dodgy knee/ankle/ponytail, the price they are willing to pay should be different to that without the information. He also saw those people who sold with recognised avarice as evil people – something that could certainly be levelled at the ticket pricing strategy of football today, or dare I say it, football agents.

So there we have a brief explanation as to how a 13th century Italian monk came up with the first, truly fair rules of the transfer market. That ladies and gentlemen, is the theory of just pricing.

Part 9 – The Theory of Collective Insanity

In 1841 the Scottish journalist and future Alloa Athletic fan Charles Mackay published his most famous work – an essay that today is the piece of work that every Premier League club religiously reads each summer when talk turns of ticket pricing. The Extraordinary Popular Delusions and the Madness of Crowds focused on the herd-mentality of people and how it influenced prices.

8829793588_0aced7c6b7_kMackay’s hypothesis was that crowds acting in a collective frenzy of speculation can cause the prices of commodities to rise far beyond any intrinsic value they should have. He looked at the examples of the South Sea Bubble of 1720 as a classic example of how this theory worked. If Charlie was alive today, he could well just pick a Premier a League football club as a modern example.

His 8 step model to document the steps to how crowds breed collective insanity is as follows. Whilst in this example we use ticket price, the transfer market is an equally valid case study:-

1. Extraordinary conditions occur in the footballing world such as a team getting promoted to the land of milk and honey, or in the case of some also ran sides (Swansea City, Stoke City, Hull City, Spurs) they win a trophy or get into European competition.

2. Success means ticket prices rise in tactical ways – match day walk up tickets for instance.

3. News of price rises is published to great dismay among supporters

4. Mass discussion on forums/social media normally leads to comments like “well you don’t have to go”.

5. Other clubs notice. They put their prices up too, thinking that despite not having any success, that it’s the trend in football, blaming agents fees or lack of TV money.

6. Crowds breed collective insanity – the tipping point is reached

7. Football eats itself, the club gets knocked out of Europe in 1st round because the manager fields a weakened team to concentrate on the Premier League. Results are poor, manager is sacked and club goes into free-fall.

8. Attendances fall, club realises they need to drop ticket prices.

Earlier in the season, the BBC published its study of the cost of watching football in this country.  Essentially, the research was a pile of rubbish.  Instead of going to do the research themselves (type in club website into browser, find page that says “tickets”, note down prices) then sent a survey to each club.  So when West Ham responded and said their cheapest ticket for a Premier League game was £20, people thought “wow, that’s good value”.  However, that priced ticket was only available for 1 game this season, the pre-Christmas match versus Leicester.  It wasn’t the averaged priced one, which is over DOUBLE that.  Ticket prices continue to outstrip inflation simply because of the theory above.

So there you go – the Theory of collective insanity in a nutshell. Next time your club puts its prices up blaming players wages you’ll know it’s really that pesky Alloa Athletic fan, Charles Mackay, to blame.

Part 8 – The Theory of Value

In the eighth of the Football-themed Economic articles, one of the world’s greatest mysteries is unravelled.

Former Morecambe, Stockport County and Grimsby Town striker Phil Jevons may not appear to be much of a deep thinker but the Jevons family are famous for defining one of the more interesting economic theories – that of utility and satisfaction.  His distance ancestor, William Jevons was a bit of a brain box, creating a piano that played itself based on logic and an early computer that could analyse the truthfulness of an argument.  Forward thinking indeed for the late 19th century.

Jevon’s theory was simple.  Too much football makes you bored.  Remember when live football on TV was restricted to the odd Home International and the FA Cup Final.  Match of the Day and The Big Match gave us a couple of highlights every weekend and that was it.  And we lapped it up.  Cup Final day was an eight hour footballing extravaganza that the whole family watched.

8710863386_841af277e1_bWhen England played Norway in a pointless early season friendly in September the official attendance was 40,181.  Official means that the FA included all those lucky people who bought Club Wembley seats some time ago…bought yes, attended the game? Maybe not, so the attendance was probably significantly lower than this.  Yes, but what about those watching on ITV I hear you say?  4.5 million people switched on at some point during the game – nearly half of that who enjoyed the delights of The Great British Bake Off on BBC at the same time.  Why?  Well, perhaps because of the theory that Jevons articulated.

Jevons said that the more that we consume of a product, the smaller the increase in satisfaction we receive from it.  With that statement he created the law of diminishing marginal utility.  Whilst we all want our team to be winning week after week, we would actually gain less and less enjoyment from each win.  Interestingly enough, according to Jevons, demand for the product should actually decrease and that will in turn reduce the price.  Think of going out after the game and having a few beers.  At some point they stop being enjoyable and actually start doing you harm as the hangover kicks in.

In footballing terms we can see both sides of the coin.  Teams who win week after week are actually more in demand.  Crowds go up, fan satisfaction increases and in the true economic sense, a club could actually charge more for the product and the fans would continue to a point where the price for “satisfaction” becomes unsustainable.  But if we start to lose, then we get less and less enjoyment out of each game and eventually even the most ardent fan gives up.  The moral here according to Jevons, spurned another famous saying – “You win some, you lose some” – that’s what keeps us football fans interested.

And that, ladies and gentlemen, is The Theory of Value in a nutshell.

Part 7 – The Veblen Effect

In the seventh of his deep-thinking articles, our in house Economist Stuart Fuller demonstrates why lowering ticket prices is a bad thing.

Hands up who wants a Rolls-Royce?  Ok, apart from Cynical Dave and Deaks who can’t drive.  We would all love to own one, right?  But it is just a dream for when we win the lottery, or England enjoys Sahara-like conditions and the solar panels on the roof of the Main Stand pay us a fortune.  But what if they reduced the price by 90%?  Would you still want one then if every Tom, Dick and Deaks could afford one?  Second thoughts eh?  That is the Veblen effect for you.

15791879632_0be24a2e8b_kThorstein Veblen* came up with this theory back in 1899.  Sheffield United had just won the FA Cup and paraded the trophy at Bramall Lane.  Veblen was unhappy that only a few thousand fans were in the ground, singing a version of Annie’s Song that was so cruelly credited to John Denver nearly eighty years later.  He hated the fact that it was an “Exclusive” club, with ticket prices kept high to keep out the riff-raff.  “Let them eat Eccles Cake” he famously said, referring them to becoming Sheffield Wednesday fans.

Veblen’s theory was relatively simple.  He noted that some types of luxury goods, such as high-end wines, designer handbags, luxury cars and tickets to see United were prestige items, or as he liked to call them, Veblen goods.  He noted that in decreasing their prices, people’s preference for buying them also diminished because they are no longer perceived as exclusive or high-status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the goods even more preferable.  So he argued that Sheffield United should actually increase their ticket prices to drive up attendances.

Even a Veblen good is subject to the dictum that demand moves conversely to price, although the response of demand to price is not consistent at all points on the demand curve meaning that it is not simply good enough for a football club to slash its prices as people will not see any value at all in what is now on offer (See our previous article on Pay What You Want Theory).

It seems someone in the Premier League found Veblen’s original work in a drawer when moving desks at Premier League HQ a few years ago and passed the idea across to the Premier league clubs who immediate put their ticket prices up thinking the fans will flock through the gates.  They were wrong, Veblen was wrong and yes, we all want a Rolls-Royce for the price of a Lada.

And that, ladies and gentlemen, is Veblen Theory in a nutshell.

*Whilst Veblen came up with the theory, it is unclear whether he really was a Sheffield United fan.

Part 6 – The Bandwagon effect

In the sixth of my deep-thinking articles motivated by wasted years in Economics lectures, I try to explain why football fans are the most fickle people in the world.

“I was there when we were relegated against Middlesborough at The Bridge.”  It’s amazing how many Chelsea fans I meet who, when I claim were “Johhny-cum-lately’s” wheel out the fact they were there when The Blues were relegated for the last time back in 1988.  Of course, back then stadiums could hold hundreds of thousands of fans.  These fans will have you believe they have been die-hard blues forever and a day.  However, we all know that they simply jumped on the bandwagon about 3 minutes after Roman Abramovich arrived in SW6.

8113550145_fca2b7e62e_zBut there is actually an economic theory that explains this action.  The bandwagon effect is a phenomenon whereby the rate of uptake of beliefs, ideas, fads and trends increases the more that they have already been adopted by others. In other words, the bandwagon effect is characterized by the probability of individual adoption increasing with respect to the proportion who have already done so.  As more people come to believe in something, others also “hop on the bandwagon” regardless of the underlying evidence.  The tendency to follow the actions or beliefs of others can occur because individuals directly prefer to conform, or because individuals derive information from others.  Big words indeed from Mr Solomon Asch there who derived the theory from his conformity experiments back in the 1950’s after watching his beloved Portsmouth win a second consecutive Football League Division One title.

Whilst the Pompey Chimes rang out around Fratton Park, Sol wondered where all these fans had come from.  A few seasons earlier they had been giving away free tickets to the Royal Navy to fill up the ground and now that they were the best team in England it was standing room only, quite literally.  He concluded that when individuals, or fans in this case, make rational choices based on the information they receive from others, in this case fellow fans down the Dog and Duck or in the “pink ‘un”, information cascades can quickly form in which people decide to ignore their personal information signals and follow the behaviour of others – i.e whilst yesterday they were a Southampton fan, today they support Portsmouth because people like the winning feeling.

A year later when Tottenham Hotspur won the league all of those die-hard Pompey fans disappeared from where they had come from.  Why?  Well Asch had the answer in his original theory.  He said that the fact information “cascades” explains why their behaviour is fragile—these “fans” understand that they are swayed on very limited information. As a result, fads form easily but are also easily dislodged.  That explains why you never see a Blackburn Rovers fan anymore and probably why you wont find many Whitehawk ones…apart from Terry Boyle that is.

And that, ladies and gentlemen, is The Brandwagon Effect in a nutshell.

Part 5 – The real deal in fake shirts

In 2012, the major professional sports leagues in the United States lost over $13 Billion in revenue due to sales of counterfeit shirts and merchandise including a whopping $3 Billion alone from the 32 teams in the National Football League (NFL).  Some top end “authentic elite” team shirts which should retail for $250 could be found online with an 80% discount*.   These numbers, whilst staggering on their own, are just a drop in the ocean when we look at the total “black” economy which runs annually into trillions of dollars.

8835116252_85b97df617_kIn Europe, football means something very different to the American version.  Whilst the biggest NFL sides can expect to sell tens of thousands of shirts (neither official shirt supplier Nike or the NFL will actually reveal unit sales), the unit sales for the best selling “franchise”, 2014 Super Bowl champions Seattle Seahawks pales into insignificance to current European Champions League winners Real Madrid who sell over 1.4 million shirt sales per annum, the vast majority now bearing the names of twin superstars Ronaldo and our very own Gareth Bale.  Hot on their heels is Manchester United and Barcelona, each selling over a million shirts per annum. The top ten football clubs sell over 7.5 million shirts per annum across the globe, significantly more than the top ten clubs of any other sport.

Obviously these numbers only reflect the official sales.  Browsing the new adidas store at Bluewater last week I picked up a Real Madrid shirt, complete with an official Champions League badge on the sleeve. The prices tag? £60. Last month Nike and the Football Association found themselves being the talk of the town for the wrong reasons with questions even being raised in the Houses of Parliament over the price of the New England shirt, with those “authentic elite” versions again costing upwards of £90.

Football shirts are not luxury items, yet their official price tag puts them in the same category as similar types of items sold by the likes of Armani, Gucci and Versace.  £60 for what essentially is a t-shirt is simply crazy, irrespective of the new-fangled material used to differentiate the latest version from the almost identical one released the previous year.  They are a lifestyle purchase. Whilst a very small numbers of sales will be based on fashion sense, the vast majority are based on the blind loyalty that football fans have for their team.

In the last few years manufacturers and clubs alike have come under criticism for the number of new kits they bring out.  Whilst nobody is forced to buy the new, upgraded version of the shirt when it is released, that same blind loyalty has has queuing up to buy the shirt on the first day of sale.

It is the rule rather than the exception that clubs bring out a new football shirt every year.  Not just one shirt, but in some instances six different versions if you count the special “European campaign” and goal keeper ones. Chelsea, for instance, have released fourteen different kits, excluding their goalkeepers one, in just five seasons.

With the retail cost increasing every year it is no wonder that the market for counterfeit goods is swelling every year. Just last month a huge haul of fake football shirts was discovered on its way into the United States. More than $1 million worth of Chelsea, Barcelona and other major European football teams shirts were found in a container at Savannah Port in Georgia that had arrived from China.  The US Customs and Border Protection force will readily admit they got lucky in finding the counterfeit items in Georgia – hundreds of millions more pass under their noses every year without detection.

The majority of counterfeit football shirts are made in Asia where raw materials and workers wages are very low.  Over the course of the last few years I’ve been to the Grand Bazaar in Istanbul, the Night Market in Marrakech, the Ladies Market in Hong Kong and even the Sunday Boot Fairs of Sidcup.  Vast ranges of every major football shirt can be bought for just a few pounds.  The quality of the counterfeits varies per seller, with some offering “special edition” shirts.  When I was in. Morocco two years ago, one stall was selling Manchester United, 2012 Premier League Champions shirts, made specifically for the Reds title success.  The problem? Rivals Manchester City won the title with virtually the last kick of the season.

It is fairly obvious that you aren’t buying the real thing at the price they are being sold for, although production techniques now mean that fakes come in a variety of grades of quality.  At the low end the wrong material and non-exact match colours will be used and often there will be spelling mistakes (Liecester City anyone?) whilst the higher grade ones will often have all the bells and whistles of the real thing including holograms and inside printing.

But there is another side to counterfeit football shirts that you may not have considered and that is the conundrum of brand awareness.

Consider this situation.  Every counterfeit shirt carries the branding of not only the football club, but also their main commercial partner(s).  The whole reason why major brands invest millions into putting their logo on the front of a football shirt is to increase their brand awareness both in existing and new markets.  The hundreds of millions invested by Emirates into their sponsorship of Arsenal, Olympiakos, Paris Saint-Germain, Hamburger SV, AC Milan and now the European Champions, Real Madrid means they have huge global exposure from the sales of official shirts.  But their logo also appears on counterfeit items as well, increasing their global reach albeit through illegitimate channels.

Consumers simply associate Emirates with these shirts, irrespective of the legitimacy of the shirt.  Whilst the airline may be deeply unhappy that their logo is being used on counterfeit items, they are essentially increasing their return on investment through free advertising. I have no doubt that the sales of fake shirts are taken into commercial consideration when they are negotiating their deals, but it is a by-product that they inadvertently benefit from.

And what of the clubs themselves? Football is now a global game.  The elite clubs no longer consider the summer break as a chance to rest and relax.  They now travel far afield to play exhibition games in front of sell-out crowds in new markets.  The forthcoming Guinness International Champions Cup in the USA is an example of this where some of the world’s biggest clubs including three of Emirates sponsored teams, Olympiakos, AC Milan and Real Madrid will play a series of games around the USA to boost interest in the game.  Last year Chelsea travelled to Singapore and Malaysia, whilst Manchester United played in Hong Kong as part of their strategy of increasing their global fanbase.

Many of these fans, in the Far East especially, have significantly less disposal income than their core fans have in England.  They cannot afford the real-deal, climacool, multi-weave new shirt at £60. But they can afford the counterfeit at £5.

By buying a counterfeit shirt, one that they can afford, they are still buying into the brand, happy to market the club by wearing the badge, albeit one that may not be official. Does this make them less of a fan?  By spending 90% less on a shirt they can then afford to buy a ticket or subscribe to the club’s online streaming content.  What is more important to the club? New fans who will engage with the club on a regular basis or ones who will contribute a small amount of money once a season through an official shirt purchase.

The whole sports apparel and merchandise market is unique.  Someone who buys a counterfeit Gucci shirt or a fake IPhone charger is doing so for very different reasons than someone who buys a fake replica Barcelona shirt.  Whilst football clubs need to have a brand protection strategy in place, are counterfeit shirts the maker concern for global sporting brands? It’s an interesting debate, one that will certainly differ whether you have the emotional engagement as a fan or the commercial view as a sponsor or the club itself.

*Source:  Allan Brettman, “NFL, Nike fight to keep counterfeit products off the market,” Orgonian, November 16, 2013.

 

Part 4 – Value Proposition

Why Dulwich Hamlet rather than most other teams were the real winners on Non-League Day back in September.

On the 6th September, Non-League Day broke all records, with over 50,000 fans attending games in the top three levels of the grassroots game.  One of the biggest crowds was at Champion Hill, home of Dulwich Hamlet, where 2,856 people saw their Ryman Premier League game.  More people attended the game against Hampton & Richmond Borough than at Football League matches at Accrington Stanley, Dagenham & Redbridge, Exeter City and Morecambe.  Pretty impressive, but why did they get so many people to that game?

dulwich-hamlet-non-league-day-1The answer can be found in a theory first proposed by US Economists Ayelet Gneezy and his brother, Uri.  Their research took them around the US, visiting Theme Parks (that is a real job apparently) and testing people’s propensity to part with cash.  Their concept was to sell photos of visitors on roller coasters under the principal of “Pay What You Want”.  Whilst their results showed that more people bought the pictures than when they were at a fixed price, the average price was so low that they actually made a loss.  BUT when it was announced that the Pay What You Want was coupled with a charitable cause, the price paid on average increased by nearly seven fold.  They summed up this behaviour as individuals feeling bad when they paid less than the perceived value for something if they knew the money was going to good causes.

So what has that got to do with Dulwich Hamlet?  Whilst many clubs announced free or pay what you want for Non-League Day, fans didn’t necessarily see the value in the game they were paying to watch.  Some, for instance had already paid to attend as season ticket holders, others were simply skin-flints.  However, couple it with a charitable element, such as Dulwich Hamlet did and people are willing to pay more for the same event, because if they simply paid what they felt the true value to be, they would inherently feel bad – us humans do have consciences after all.

Our own experiences of Pay What You Want back this theory up.  Back in March 2013, 405 attended our midweek game against Carshalton Athletic.  The first encounter had been abandoned due to floodlight failure, yet the re-arranged game saw a bigger than average midweek attendance.  In fact, the attendance was identical to that a few days later on a Saturday when Kingstonian visited.  The average payment was approximately £2.40 per head, about 60% less than we would normally take on a match day.  Compare that to a Pre-Season game, on a Friday, in peak holiday season in July against a team just promoted from the County League with little or no marketing.  An attendance of 250 for the game against East Grinstead Town was more than we expected, but what was very interesting was that they paid £2.50 on average.  Why? Because all of the takings were for charity.

And that, ladies and gentlemen, is The Theory of Pay What You Want in a nutshell.

Part 3 – Regression Theory

Trying to explain famous Economic theories by using football as the model I am looking at the work of Francis Galton on Regression Theory.

After three games in the Premier League this season two teams could boast 100% records.  Top of the table on goal difference was Chelsea but level on points with them after three wins out of three was Swansea City.  At the start of the season, Swansea were 5th favourites for the drop and faced Manchester United at Old Trafford on the opening day.  Even the most ardent Swans fan could have hardly predicted the start they would have made.

9563237683_4e0bf0f617_bBut realistically they were never going to stay at the top of the league, were they?  That is because there is a hierarchy in place, whether teams like it or not.  Swansea at some point in the season will lose three games in a row and essentially return to their natural level.  That effect is the basis of Francis Galton’s work on identifying Regression Theory.

The term “regression” was coined by Galton in the nineteenth century to describe a biological phenomenon. The phenomenon was that the heights of descendants of tall ancestors tend to regress down towards a normal average over a period of years.  But I don’t buy that.  What he was really predicting was the bouncebackability (he actually invented that word too) of teams who either punched above their weight or failed to meet expectations.

Swansea is an interesting case.  For years they have been a third or fourth tier side in English football.  Their main claim to fame was changing their name from Swansea Town to Swansea City to reflect the changing status of the town/city.  Back in the 1980’s they rose from the 4th tier of English football to top the old Division One in a short space of time, relying on pay big wages to aging stars for one last hurrah (and pay packet).  As quickly as they achieved fame, they quickly slid down the leagues and only avoided the ignominy of relegation from the Football League due to a police dog biting a player (long, urban myth-based story which in reality has nothing directly related to staying up but, hey, the press loved it).  That is a prime example of regression theory.  Short term boost caused by internal (buying good, if old players) and external (traditional good sides becoming crap – reverse regression theory) factors, followed by longer term return to normality.

There is, however, one factor that “resets” the regression base line in football, and that is money.  Shed loads of it that is currently floating around the Premier League. A small team reaching the Premier League today is like a Charlie Bucket finding the last Willy Wonka’s Golden Ticket.  They will never be poor again and consequently, Galton’s theory is a load of old bumf.

And that, ladies and gentlemen, is Regression Theory in a nutshell.

Part 2 – Market Uncertainty

Trying to explain famous Economic theories by using football as the model.  Today, the work of George Akerlof on Market Uncertainty.

The Market for Lemons was a controversial piece of research published by Nobel Prize-winning academic and famous Leyton Orient fan, George Akerlof.  Up until his work was published, most economists believed that markets would allow everyone willing to sell goods at a certain price to make deals with anyone who wanted to buy goods at that price.

IMG_1105Akerlof, frustrated by the fact that the O’s (back then they were just Orient) kept bringing in short-term players who were basically rubbish, explained how uncertainty caused by limited information caused markets to fail.  As a football club who hold a player’s contract have more information about him than a potential buying club, it can often be a bad move to buy the player.  In other words, if you do not do your research on a player, you are liable to buy a lemon.

Whilst Akerlof’s research was based on the second-hand car market in the US, he also kept a close eye on the transfer dealings of third tier English football clubs.  In the same way that sellers of better-than-average cars to sell will withdraw them from the market because it is impossible for them to get a fair price from a buyer who is unable to tell whether that car is a lemon or not, football clubs needed a way to ensure that they weren’t buying an old crock.

He suggested that football clubs could “borrow” a player for a short period of time to see if he is fit, able and not a mass murderer before they made a decision to buy him.  That way, a fair price could be determined between the buying and selling club.  Furthermore, he concluded that if a player is passed from club to club on loan then he is a lemon, just like a used car that has had dozens of owners.

Football clubs that are desperate to sign a player for a particular position, perhaps due to injury, are often held to ransom by selling clubs, knowing that they can try and extract a few more million for a player who is completely over-valued.  Rather than over paying for the player they are forced into the loan market where they may get some short-term gain but ultimately, loan deals are flawed in the same way that second hand cars are.

And that, ladies and gentlemen, is the theory of Market Certainty.

Part 1 – Behavioural Economics

Trying to explain famous Economic theories by using football as the model.  Today, the work of Amos Tversky and Daniel Kahneman in defining Behavioural Economics.

Up until the 1980’s, standard economic theory was dominated by the idea of the “Rational Economic Man”, a theory first expounded by Adam Smith in his 1776 work, The Wealth of Nations.  He said that football clubs will charge as high a price as possible for admission, not caring whether fans can actually afford to come or not.  If fan A is priced out of the market, then he will be replaced by Fan B, with his half and half scarf on.  Fans make decisions of whether to attend based on costs and the benefits – i.e how much will it cost them and will the team win?  So essentially the two parties are at polar opposites.

However, Tversky and Kahneman realised that Football fans were basically irrational beings who would follow their side through thick and thin, spending ridiculous sums of money for any pieces of plastic crap with a logo on.  Countless marriages have been ruined over the last hundred years because football fans love their teams more than their partners.  That’s the theory of irrational thinking or Behavioural Economics.

14718955248_a8a53f7990_zThe two Maccabi Haifa fans saw that football fans behaviours and actions are unpredictable when the circumstances are uncertain.  Last season the crowds at The Dripping Pan dropped off towards the end of the season as we were on a poor run.  Fans faced a decision as to whether they would come and see us lose on a Tuesday night or stay at home and watch Holby City.  With the outcome predictable, fans acted rationally, deciding to stay at home in the warm, earning browny points from their partner and kidding themselves they are having a better evening, whilst secretly checking the action on Twitter every few minutes.

But give us the slight chance of a win and fans will travel to the middle of nowhere on a Tuesday night to support the team.  How many fans would we have got at East Thurrock United a few weeks ago if we hadn’t won the two previous games?

Tversky and Kahneman found that fans will travel to Leiston, in the middle of nowhere and involving a 5 mile trip to the nearest station because they have some decent pubs serving Adnams and we have a good record there but will shun a Monday night trip to Wealdstone for obvious reasons (apart from the fact we are often stuffed there).

In summary, football fans when faced with making a decision where the outcomes are uncertain do not think about the facts rationally in terms of “how much will it cost me to watch the away game at VCD Athletic”.  They think about the chance to visit a new ground, a few beers and the opportunity to give a goal keeper some friendly stick.  This, in summary, means that fans are not 100% rational.

And that, ladies and gentlemen, is the theory of Behavioural Economics.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s