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

Economic Theory explained by Football – 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.

Economic Theory explained by Football – The Concept of Marginal Gains


Just down the road, 2 1/2 hours before Lewes kick off in their game against Farnborough, The Football League Championship’s two clubs go head to head.  Brighton & Hove Albion are the last remaining unbeaten team in the top 10 divisions of English football, a remarkable turnaround from last season where they avoided relegation in the last few weeks of a season characterised by dull, scoreless football.  Back in the Summer, Chris Hughton brought his first team squad down the A27 and could count themselves lucky to go back with a 0-0 draw.  Confidence was high from the Lewes camp, whilst the draw against a team five divisions lower hardly increased the membership of the Hughton Appreciation Society.

Six months on and the situation could hardly be more different.  Hughton is being hailed a messiah by the North Stand faithful whilst Lewes are still looking for their first home win and are looking up the skirts of every other team in the Ryman Premier League.  We could spend hours debating why, but it is more important to touch on what the future holds in my opinion.

In the last few days I’ve read a couple of interesting pieces about the finances of The Seagulls.  The superb Swiss Ramble analysed the numbers in detail on his website last week, There can be no denying the investment by owner Tony Bloom in the club, both on and off the pitch, and for the sake of their loyal fans I hope they do reach the promised land of the Premier League, not only because they deserve a crack at it, but to also give Bloom some financial return on his huge investment.  Footballing history has given us plenty of examples as to where the single investor model turns sour at some point, and whilst Brighton fans may say “It’ll never happen to us with our Tony around”, I’m sure that is what Bolton Wanderers fans said when Big Phil was splashing the cash for Big Sam at the Reebok.

FullSizeRender (16)But what about Lewes?  We don’t have the ownership model that means we are indebted to one person.  However, we are bottom of the league.  In such situations managers tend to grab at any straw going.  How often will you see them bring in a raft of new players to try to solve an issue, normally expelling a fair few out the back door.  It is very rare that the financial situation in such cases ends up with the club making a profit on the dealings or paying less wages.  We all deep down know that, unfortunately, Chelsea will not get relegated this year.  Whoever comes in in the short-term will be given some patience and will make small changes that turn defeats into draws, and draws into wins.  Before you know it they will be knocking on the door of the top seven.  Why?  Because in most instances, teams do not become bad teams overnight or even over a pre-season.  If you can keep the same core of players then with small adjustments they will become better gradually.

This is the theory of marginal gains.  The concept is that if you improve in every variable underpinning or influencing your performance by just 100% then cumulatively you get a significant performance improvement.  The Performance Director of British Cycling, Dave Brailsford is often quoted as the biggest proponent of the theory, but it was actually Sir Clive Woodward to first openly admitted to using the concept in the preparation for the 2003 Rugby World Cup in Australia, that England would ultimately win.  “Winning the World Cup was not about doing one thing 100% better, but by doing 100 things 1% better” he said post tournament.

So what does that actually mean for a grass-roots club like Lewes?  It means working with the management team to make sure when the team step onto the pitch they are 100% prepared.  Kit may seem a small issue, but for one player having a pair of shorts that aren’t too tight could be that 1%.  Energy drinks – another 1%.  Ensuring the showers are hot – 1% and so on.  That’s obviously not going to be the reason why Chelsea improve but their 1% gains may come from preparation patterns, pre-match meals, warm up routines as well as personnel changes.

Lewes manager Darren Freeman has been used to winning both as a player and a manager.  He has a formula as to the type of player that he wants to see pull on the red and black shirt each week.  Coming into the club where it was already in the bottom four and three months into the season, his marginal gains are a lot tougher to deliver. But that doesn’t stop him trying.  There’s not going to be one single event that can turn the current situation into a rosier one – unless half a dozen teams all play ineligible players for 5 or 6 games in which they win and get 15 point deductions.  So the club has to look at improving marginally, and more importantly, within budget, in a multitude of areas.  Obviously, players will come and go such as this week where a new winger and a new centre-forward have come in, replacing an existing proven scorer.  Unusually, the net effect of the transfer dealings is financially positive.  Two for the price of one – a marginal gain in terms of squad numbers.

Fans obviously play a part as well.  Any Brighton & Hove Albion supporters heading back to Lewes that could be enticed in, irrespective of the price they pay should lead to a marginal financial gain.  The cost of admitting one extra fan is essentially zero.  There is a stewarding cost, but you can only set that prior to the game based on what you think the crowd would be.  If an additional 1,000 fans turned up today it would cost the club nothing extra but we would gain from whatever they pay through the turnstile and then food/drink/merchandise and so on.  That revenue would then boost the budget which would then be re-invested in different aspects of the club and thus delivering that marginal gain.

PastedGraphic-2-page-001It’s fair to say that the biggest marginal gain from today’s game though would be three points.  In fact, anything less than three points would be a significant blow to the club.  Farnborough’s off the field problems are well documented, falling from being just one game away from the Conference Premier four years ago to facing expulsion from the league.  We’ve been there and know how the fans pain feels, knowing that their fate is often out of their hands.  But for today it would be all about the Lewes win.  Still without a home win this season, Lewes could at least look to Farnborough’s away record of drawn one, lost ten as a positive omen.

The marginal gains philosophy and approach is  hardly rocket science. It’s a simple idea, but with many simple ideas, takes some energy, commitment and discipline to see the positive results.  Alas those three words are often lost on fans who want immediate results.  As a club we have to balance both.

Lewes 1 Farnborough 0 – The Dripping Pan – Saturday 19th December 2015
It has only taken 269 days but finally we have a home win to celebrate.  25th March was the last time we really got to dance a silly jog of delight on the Philcox at the full-time whistle but yesterday we got that winning feeling again.  In terms of marginal gains the result was huge. We got 3 points, 3 more than the six teams above us.  In the grand scheme of things it makes little difference to the table or the threat of relegation, but we came out of the day the winner at the bottom end.

FullSizeRender (15)Farnborough were poor.  They lined up with a 5-3-2, failed to get one shot on goal, picked up five bookings and the only threat they posed was when Estonian striker Vastsuk threw himself to the ground in the penalty area and picked up a caution – interesting that we normally only see antics like that from players with league experience, and Vastsuk is no different, on loan from Reading.  Good to see the professional game teaching players the importance of ethics.

Lewes were good.  They started strongly and could have had a couple of goals (and at least one penalty) before Phil Appiah’s 25 yard blockbuster on the stroke of half-time put The Rooks in the lead.  By then the curse of the new striker had struck as George Landais limped off on his debut.  His replacement Trevor McCreadie was denied a penalty in the second half by yet another poor performance by the officials, being tripped in exactly the same spot as last week in the area.  OK, it wasn’t a vintage performance, probably not as convincing as last week’s draw against Leiston BUT you could see the 1%’s.  Winger Junior Ogedi-Uzokwe beat his man more frequently, the two centre-backs blocked more shots on the edge of the area, James Fraser looked a little more match fit.  Marginal gains.

So we danced all night to the best feeling ever.  Three points can make or break your weekend.  Hopefully the couple of dozen Brighton fans who decided to stick around after their painful first defeat of the season will have enjoyed a pint of Harvey’s, a slice of Christmas Pie and a goal worthy to win any game.