Economic Theory explained by Football 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.

Economic Theory explained by Football 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.

 

Economic Theory explained by football – 18. The Resource Curse


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.

Economic Theory explained by football – 17. Endogenous Growth 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.

Economic Theory Explained by Football – 16. The Moral Hazard


Back by popular demand (well, at least from one person) for the new season is the continuation of our series on trying to explain Economic Theory by applying the principals to football.  The first in series 2 is concerning the Moral Hazard Theory and how a player’s behaviour changes once he has a new contract.

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 sign 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 match.  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