Category Archives: Sport

European Super League and so much for Joseph Schumpeter

Economist Joseph Schumpeter talked about creative destruction in that to survive capitalists continually seek more profits through the pursuit of new markets. With the presence of new markets this brings about more innovation removing the old businesses and opening opportunities for the new.

The free market, in which business is supposed to thrive, is based on weak barriers to entry, competition and less regulatory constraints. The extreme of this theory is perfect competition although in football we don’t have homogeneous products in that all teams are different. However the market does give teams the chance to gain promotion from lower divisions in English Football. Take for instance Leicester City winning the EPL and before them teams like Blackburn Rovers, Aston Villa, Nottingham Forest – the latter winning the league having just been promoted from the Second Division (in those days). These teams used innovation, coaching, strategically delving into the transfer market (not with the funds that some clubs have today) etc to form a successful team.

Nottingham Forest – Div 1 Champions 1977-78

The proposed ESL was all but free-market capitalism with an American style franchise system with 12 teams guaranteed a place in the competition – significant barriers to entry and not conducive to competition. So much for Joseph Schumpeter’s creative destruction with a group of elite clubs protecting their market and the owners being rentier capitalists. The ESL’s proposed move is similar to what has been happening in the market place – a structure of businesses taking huge debt and taking little interest in competition as long as they are making money. Manchester United, probably the most famous club in the world, got knocked out of the Champions League in the group stage but are still making a lot of money for the owners. It seems that the desire to win trophies has been superseded by profit – the proposed ESL avoids competition as member clubs are protected against the risk of failure. Not to say this is not already happening as the EPL and many other leagues in Europe are dominated by a small number of clubs which have significant funds available. This makes it near impossible for the other clubs to be competitive – remember Wimbledon winning the FA Cup in 1988 with the ‘crazy gang’. They had the worst stadium, poorly paid players and the lowest gates. It is hard to see supporters of less wealthy clubs being too enthusiastic about the excitement of victory.

The ESL has demonstrated that global capitalism operates on the basis of rigged markets not free markets, and those running the show are only interested in entrenching existing inequalities. It was a truly bad idea, but by providing a lesson in economics to millions of fans it may have performed a public service. Larry Elliott – The Guardian – 22-4-21

The America’s Cup: multiplier effect and cost-benefit analysis

Source: RNZ

I was fortunate enough to be out in the spectator fleet for yesterday’s America’s Cup racing between Emirates Team New Zealand and Luna Rosa Prada Pirelli – honours were even in the two races. As with most events, analysts attempt to work out the multiplier effect and the impact it will have on an economy. In 2017 forecast, predicted that the America’s Cup would add between $600 million and $1 billion to the New Zealand economy. Employment would be boosted and in the longer term for every $1 put into infrastructure would generate $7.50 of economic activity. However with the impact of COVID-19, New Zealand will suffer a loss on the $249.5 million it invested in the America’s Cup, but there maybe benefits over time.

The Multiplier Explained

Consider a $300 million increase in business capital investment. This will set off a chain reaction of increases in expenditures. Firms who produce the capital goods that are ultimately purchased will experience an increase in their incomes. If they in turn, collectively spend about 3/5 of that additional income, then $180m will be added to the incomes of others. At this point, total income has grown by ($300m + (0.6 x $300m). The sum will continue to increase as the producers of the additional goods and services realise an increase in their incomes, of which they in turn spend 60% on even more goods and services. The increase in total income will then be ($300m + (0.6 x $300m) + (0.6 x $180m). The process can continue indefinitely. But each time, the additional rise in spending and income is a fraction of the previous addition to the circular flow.

The value of the multiplier can be found by the equation ­1 ÷ (1-MPC)
You can also use the following formula which represents a four sector economy
1 ÷ MPS+MRT+MPM

Source: CIE Revision Guide by Susan Grant

The economic impact is based a lot on the multiplier effect but the use of cost benefit analysis also considers those external costs and benefits which are not easily convertible into a monetary value.

Evaluation of CBA
It is clearly more efficient for public spending to be subject to rigorous analysis, rather than based on the whims of politicians. However, there are a number of criticisms of CBA, including:

1. It is often very costly to undertake, though usually this forms a very small proportion of total project spending.
2. Assessing the monetary value of external costs and benefits is often very difficult. What precisely is the value of the congestion that would be reduced if a new bi-pass were built around a busy town? How much extra tourist revenue will actually be gained from a new airport? How long will the building be used as a venue, as in the case of the Viaduct area in Auckland for the 2020/21 America’s Cup. One solution to this problem is shadow pricing, where analysts attempt to place a value on the costs and benefits of a decision or a project where an actual market price does not exist.
3. Changing circumstances can make initial projections appear grossly inaccurate. The Wembley Stadium project in London went considerably over-budget, and the majority Olympic Games are far more costly than originally estimated. For instance the Montreal Olympics in 1976 was eventually paid off in December 2006. Higher interest and inflation rates, and falling exchange rates can all dramatically affect costs.
4. Actual costs can also rise above planned costs as a result of moral hazard, where project managers go over budget because they expect that those who fund the project will make extra funds available, providing an insurance against their over-spending.
5. Ultimately, decisions to go ahead with projects are only guided by CBA, leaving politicians to make the final decision. Politicians are free, of course, to ignore the results of an appraisal.

If you have read the book Circus Maximus you will no doubt be aware that most big sporting events run over budget and in some cases don’t generate the benefits until well after the event if at all. So just because an event runs over budget is that enough to say that we shouldn’t go ahead with the event. There are a great many other benefits of hosting an event like the Americas Cup which are not measured by GDP. The sense of community and wellbeing that comes from New Zealander’s performance whether it be in rugby or at the Olympics. It tends to bring people together feel a sense of belonging which has external benefits.

Covid-19 and matchday revenue of the 10 richest football clubs

It is always good to read Deloitte’s Football Money League annual publication and I was particularly interested to see what impact Covid-19 had on the revenue streams of the top 10 highest revenue generating clubs. It is estimated by Deloitte that this year’s Money League will have missed out on over €2 billion of revenue across the 2019/20 and 2020/21 seasons. This is primarily driven by matchday revenue – ticket and corporate hospitality sales.

Matchday business operations are the foundation for a club and they also help to dive other aspects of their business model. Although fans will want to return to grounds to support their team it remains uncertain how and when clubs can return to pre-Covid-19 revenue levels. One has to think more about the clubs in the lower divisions as the vast majority of their revenue is from spectators through the gate.

The table and chart below shows the top 10 highest revenue generating clubs in 2020. They also compare the matchday revenue between 2019 and 2020 and the difference expressed as a percentage. All but Tottenham Hotspur have experienced a decrease in matchday revenue with Juventus experiencing the biggest percentage fall – 36%. Tottenham was the only club in the Money League top ten to record an increase in matchday revenue. Despite the impact of the pandemic, matchday and commercial revenue grew to €107.7m (up 16%), demonstrating the revenue generating potential that Tottenham has unlocked through its new stadium. This was the largest amount of matchday revenue generated by any of the Premier League clubs in the year ending June 2020. Juventus and Manchester City generated much lower level of matchday revenue relative to other clubs – Juventus generated €42.3m (down 36%) and Manchester City €46.7m (down 24%).

Source: Deloitte’s Football Money League 2020
Source: Deloitte’s Football Money League 2020

The economics of transfer deals – Sevilla FC

A colleague forwarded me link to the BBC sport website concerning the work of Ramón Rodríguez Verdejo aka Monchi. Monchi spent 11 years as player at Sevilla (goalkeeper) but is recognised more for his role at Sevilla’s sporting director. When appointed Sevilla were in the Spanish second division and Monchi studied clubs like FC Porto and Lyon who won titles but were able to sell top players and replace them with similar quality players for less money. His first signing was Dani Alves who six years later went to Barcelona for £30m a profit of £29.7m – other signings by Monchi are listed in the table below which equates to and overall £189.75m profit.

Sevilla was relegated from the top flight at the end of the 1996–97 season but returned to La Liga in 1999 with a policy of sell and grow. Since then they have won the following:

  • Copa del Rey in 2007 and 2010;
  • Uefa Cup in 2006 and 2007;
  • Europa League in 2014, 2015, 2016 and 2020.

Monchi pulled off another profitable transfer this season which saw Ivan Rakitic return to Sevilla for a second spell. Originally the Croatian was signed for £2.1m from Schalke in 2011 and then sold to Barcelona for £15.3m in 2014. In September this year Sevilla resigned him for £1.36m and still playing very good football at 32 years of age.

Do the new signings perform?

The website ‘Total Football Analysis’ looked at how well Monchi’s signings performed – this included five years at Sevilla (2012/13 to 2016/17) and two years at AS Roma (2017/18 to 2018/19) – he returned to Sevilla in 2000. His time at AS Roma was not as successful as at Sevilla.

How ‘Total Football Analysis’ judged the success of his signings was by using the metric: the percentage minutes played versus the price that was paid in the transfer market – see graph below. So logically the more expensive the signings the greater the minutes played. The players in red are AS Roma and those in blue are Sevilla FC.

Upper-left quadrant – poor signings as they are players with an above-average price (more than 7.63 million euros) who played below average minutes (39.24%).

Even if we are taking five seasons at Sevilla and only two at Roma, most of the players in the upper-left quadrant are Roma players. Only Ciro Immobile, Joaquín Correa and Paulo Henrique Ganso could be considered very bad signings for Sevilla in this period, while Roma in only two seasons had Patrik Schick, Javier Pastore, Grégoire Defrel, Rick Karsdorp, Cengiz Ünder, Davide Santon and Juan Jesus in the same list. 

Lower right quadrant – excellent signings. Those are players with a below-average price who played a higher than average percentage of minutes. This time, plenty of Sevilla players make the list, but only three Roma players: Aleksandar Kolarov, Federico Fazio and Nicolò Zaniolo.
Lower left quadrant – cheap but didn’t play much, which could mean they were supposed to play that role or were bad signings
Upper right quadrant – expensive signings who played a lot of minutes as there were high expectations.

The correlation between price and percentage of played minutes is represented with the green line. Curiously, the correlation is very low for Monchi’s signings, showing the price is a very bad predictor of players performances in his case. Part of this is because of his high spending at Roma on players who couldn’t make an impact. This reinforces what we suggested before: Monchi proved to be much better at signing lesser-known players for cheap fees than at making high-profile signings. 

King’s College rowing challenge 2020 – 7×7 – 7 marathons in 7 days

After the 100k challenge last year, Jim Potts (Former Director of Sport at King’s and now at St Patrick’s College in Queensland) and I set a challenge for 2020 – to row 7 marathons in 7 consecutive days. This week we completed the challenge and would like to thank those who have joined Jim and I at various times both in Queensland and Auckland for the past seven mornings.

In Auckland special thanks to Daryl Williams (every morning), Allan Robertson, Dan Rattray, Brendan Boreham, Scott Palmer, Onosai Auvaa,  Mal Bish, and Steve Davison who have joined me on the erg. Also those that have dropped by in support and the rowing club for their encouragement. Photo from Day 3 – I am at the end with the white cap.


 The idea behind the event is to raise money for Friedreich’s ataxia research –  link below:
 
https://give.curefa.org/team/329597

English Premier League – where competition means more revenue and better football

As the season drew to a close with the Europa League and Champions League Finals last week one couldn’t help noticing the dominance of the EPL sides. To have 4 clubs from the EPL in the finals is unprecedented and testament to the strength on the EPL. A lot of the other European leagues have a dominance of one or maybe two teams – EG

  • Spain – La Liga – Barcelona won the championship easily this year. Real Madrid its closest rivals in previous years finished 3rd.
  • Germany – Bundesliga – Bayern Munich won the league for the last 7 years although Borussia Dortmund have been close on a few occasions.
  • France – Ligue 1 – Paris St German won the league by 16 points and have won Ligue 1 6 out of the last 7 seasons
  • Italy – Serie A – Juventus won the league by 11 points and it was their 8th consecutive title.
  • Netherlands – Eredivisie – Ajax won the league by 3 points from PSV Eindhoven. Third place was a further 18 points behind

US Economist Walter Neale said that a pure monopoly in sport is not good. If some team is totally dominant in a league the interest in the competition wanes and fewer fans turn up to games and also television rights become less attractive. Therefore if a club is dominant in a league it will have to look to other alternatives to generate more revenue – creating a super league amongst other teams at the expense of national leagues like the Premier League, La Liga in Spain and Germany’s Bundesliga. This would be like major sports in the USA where the same teams compete without the threat of relegation. It would also be to the detriment of local leagues in which clubs traditionally have huge followings and also generate a lot of income.

However the EPL has done well to have a very competitive competition with 6 clubs being serious contenders for the title – Manchester City, Liverpool, Tottenham, Chelsea, Arsenal and Manchester Utd. With such competition there is interest from the fan base and TV rights which makes for a profitable league. So revenue in the sports arena is generated by competition not monopoly power. The EPL title went down to the last game whilst PSG won the Ligue 1 with 5 games left.

Source: Financial Times – 15th May 2019 – ‘Premier League wins by creating room at the top for football clubs’  by John Gapper.

Ireland’s first home win against the All Blacks – Behavioural Economics

You maybe aware that the rugby game this morning (NZ time) between Ireland and the New Zealand All Blacks in Dublin created history. It was the first time that Ireland have beaten the All Blacks on Irish soil. Remember they did beat the ABs in Chicago two years ago.

Image result for ireland v all blacks

Irish supporters, including myself, will take great pleasure in talking about such a result – lets face it we lost it in the last few minutes 5 years ago on Irish soil at Croke Park in Dublin. What all this alludes to is the fact that as part of this entertainment comes without the public paying for it, the public benefits from an externality.

Those who travelled to Dublin (and those local supporters) for the game and will have no doubt spent a significant amount of Euros tonight in the bars and restaurants around town. Nevertheless the satisfaction (utility) derived in Euros from the game would have been much greater than the price they paid for the ticket. This suggest that there is a lot of consumer surplus present – the difference between the price that a consumer WOULD BE WILLING TO PAY, and the price that he or she actually HAS TO PAY. The success of the Irish team will boost merchandise sales and interest for the World Cup next year in Japan but more importantly it has been good for rugby in general with throwing the World Cup wide open. When the All Blacks play overseas there are significant externalities whether it be the revenue generated in hosting the match or the social benefits to society. Furthermore the lead up to the game brings about a sense of delayed gratification (Behavioural Economics). Looking ahead the fact that people have paid for tickets to the World Cup means that they can reap the pleasures of anticipation of being there. Research (Smarter Spending – see previous post) shows that owning material things from expensive homes to luxurious cars turn out to provide less pleasure than holidays, concerts or even witnessing Ireland beating the All Blacks – where were you when Ireland beat the All Blacks in Dublin? With Ireland’s win national pride increases, along with patriotism and people feeling better about themselves. This is turn brings people together and boosts well-being of the nation. As for the All Blacks they will learn from this defeat as they did against the Springboks earlier in the season. All in all it makes for a great World Cup with supporters experiencing the pleasures of anticipation.

Action bias and penalty kicks – is it best if the goalkeeper does nothing?

Action bias is a situation where we would rather be seen doing something than doing nothing. This has been the case in numerous government elections as the voting population like to see some action from politicians when in some cases the best option is to let the economy run its course. President Nixon (US President 1969-74) was a great one for doing something even though it would have been better to do nothing – I refer to the wage and price controls introduced in 1971 – the controls produced food shortages, as meat disappeared from supermarket shelves and farmers drowned chickens rather than sell them at a loss. So when the economy is doing badly the government maybe tempted to intervene, even if the risks associated with the changes not necessarily outweigh the possible benefits. Furthermore if an economy is doing well policy makers may feel that they shouldn’t do anything even though the changes could improve the economy further.

According to classical assumptions in economics, when a people face decision problems involving uncertainty, they should choose what to do according to their utility from the possible outcomes and the probability distribution of outcomes that follows each possible action. Bar-Eli, Azar, Ritov, Keidar-Levin, & Schein, 2007

In a 2007 study, Michael Bari-Eli at the Ben Gurion University of the Negev, Israel, analyzed 286 professional soccer penalty kicks. They discovered that goalkeepers almost always jump right or left because the norm is to jump — a preference for action (”action bias”). The goalkeepers jumped to the left 49.3% of the time, to the right 44.4% of the time, but stayed in the centre only 6.3% of the time. Analysis revealed that the kicks went to the left 32.2%, to the right 39.2% and to the centre 28.7% of the time. This means that the goalkeepers were much more likely to stop a kick if they had just stayed put – see table below.

The table above suggests that the decisions taken by the kicker and goalkeeper are made roughly simultaneously. The fact that the directions of the kick and the jump match in 43% of kicks rather than in 0% or 100% of the kicks suggests that neither kicker nor goalkeeper can clearly observe what the other chose when choosing their action.

A goalkeepers’ decision making.

In order to suggest a best option for goalkeepers it is necessary to examine the probability of stopping the ball following each combination of kick and jump directions. The table below presents the average saving chances using the formula

Number of penalty kicks saved ÷ Number of penalty kicks x 100

Jumping left = 20 ÷ 141 x 100 = 14.2%
Staying Centre = 6 ÷ 18 x 100 = 33.3%
Jumping right = 16 ÷ 127 x 100 = 12.6%

The research conclusions state that goalkeepers jump to the right or the left during penalty kicks more than they should. In analysing the 286 kicks Bar-Eli et al show that while the utility-maximising behaviour for goalkeepers is to stay in the goal’s centre during the kick, in 93.7% of the kicks the goalkeepers chose to jump to their right or left. This non-optimal behaviour suggests that a bias in goalkeeper’ decision making might be present. The reason that they suggest is ‘action bias’. However you also need to look at the psychological aspects of a goalkeeper. Arsenal and former Chelsea goalkeeper Petr Cech said that he never liked to stay in the centre as it might look to the fans that he wasn’t trying. Although he would be in a good position to save a penalty that was kicked down the centre, he would feel a lot worse if he stayed in the centre and the ball went into the goal either side of him.

Sources:

Bar-Eli, M., Azar, O. H., Ritov, I., Keidar-Levin, Y., & Schein, G. (2007). Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks. Journal of Economic Psychology, 28(5), 606-621.

An “Action Bias” Can Be Counterproductive

Football stadiums and economics

With the start of the EPL this weekend I thought it appropriate to look at something related to football. Teams in the EPL and other domestic leagues often look for funding from the government to build stadiums with the rationale that the investment will attract consumers and businesses to the local area. This suggests that a multiplier effect would be at work and the benefits to the area go beyond that of the football field.

The size of the multiplier is influenced by how much of extra income is spent on domestically produced products. The more that is passed on in the circular flow, the larger will be the multiplier. This means that the size of the multiplier varies inversely with the tendency for extra income to be withdrawn from the circular flow – the marginal propensity to withdraw. It is calculated by 1/marginal propensity to withdraw. In the case of a two sector economy, this is I divided by the marginal propensity to save (mps). For example, if people save $20 out of an increase in income of $100, the mps will be 0.2 and the multiplier will be 1/0.2 = 5.

Cities with new stadiums initially create jobs and growth but in the long-term there is little economic benefit. Why?

  1. For all their cultural significance, sports tams are not very big businesses and so their overall impact is small in most cities of any size.
  2. If local residents spend more at the stadium they are likely to reduce spending elsewhere which will impact on local businesses.
  3. A stadium may attract more visitors from outside the area who inject money into the local economy, but the multiplier effect is likely to be small because many of the services they consume will actually come from outside the area – e.g. food and beverages may be shipped in from elsewhere.

If you look at previous World Cups or European Championships there tends to be the same issues as mentioned above

The 2010 World Cup in South Africa saw Soccer City, the largest sports venue in Africa, undergo a £300 million renovation which costs £250,000 a month to maintain. It is the stadium for the Kaizer Chiefs and Orlando Pirates but is rarely full and has struggles to make revenue from other sources. See below:

Brazil spent about $3 billion building 12 new or heavily refurbished stadiums for the 2014 World Cup. Officials justified the expense by saying that the stadiums would generate revenue for years to come with Brazilian football premier league games and rock concerts but most stadiums are failing to generate any revenue. The most expensive stadium in Brasilia – 72,000 seater and a $900 million venue – is used a bus parking lot. A big issue here was that there was no major professional football team in the city so therefore limited crowds would be present. Although the organisers rationale was to improve facilities around the country there are white elephants evident – in some locations teams cannot afford the rental so will play at much smaller venues. A $600m stadium in Manaus was used for 4 World Cup games but is now empty which is not surprising as the city itself has a lower division football team who don’t have the finances. What people forget is that, although the stadiums might look good and are used to host the biggest sporting event in the world, a large number of people are displaced and neighbourhoods disestablished. But organisers say that it will add to the well-being of the population especially if the host side wins – however this has not been the case for Brazil – in fact as we know it turned out to be a bit of a trashing in the semi-final against Germany. It will be interesting to see the use of stadiums in Russia after the World Cup just gone but one cannot doubt that the morale of the Russian people was significantly boosted by their teams performance.

World Cup – the economics of faking an injury.

As the World Cup enters the quarter final stage we have seen the same old tricks played by players to try and influence the decision of the referee.

  • France’s Lucas Hernandez admitted to flopping in France’s 2-1 win against Australia in an attempt to get Australian midfielder Mathew Leckie sent off.
  • Spanish defender Gerard Piqué accused Portugal’s captain Cristiano Ronaldo of exaggerating a fall to secure a penalty kick in their 3-3 nail-biter. Piqué said Ronaldo has a habit of “throwing himself to the ground.”
  • Neymar rolling around in what seemed to be excruciating pain when there was contact on his ankle and that was on the sideline. What would he have done if it was in the penalty area and Brazil were 0-1 down?

That being said it was hoped that the VAR system would start to see this sort of tactic removed from the ‘beautiful game’. Some of the techniques of faking an injury are below – HT to Kanchan Bandyopadhyay.

The Economist has looked at this area and I thought that I would delve a little deeper. There is no doubt that if you study the costs and benefits of faking an injury there are certain sports where it is perceived as quite worthwhile – i.e. the benefits outweigh the costs. Cost benefit analysis is part of Unit 3 of the AS Level course. What is cost-benefit analysis (CBA)?

Cost Benefit Analysis (CBA) refers to estimating the private and external benefits of an investment project – airport, rail link, road etc against the private and external costs. Once these costs/benefits are established a decision is made as to whether the project should go ahead.

CBA can be applied to any decision you make and below is a table outlining the cost and benefit of faking a peanalty or injury in particular sports. I see the benefit in soccer of diving in the box and being awarded a penalty outweigh the costs by a significant amount. Firstly, if the appeal for a penalty is turned down it is very unlikely that the referee will administer any punishment to the player faking a foul. In too many cases they are happy to let the game play on as they feel under so much pressure anyway for not awarding it. Whilst in ice-hockey a suspension of either 2 or 4 minutes has acted as a deterrent to those caught “embellishing” . I have put some values in the end column which will no doubt encourage a lot of discussion – remember Warren Gatland, the Welsh coach in the Rugby World Cup 2011, considered informing a player to fake an injury so there would be no pushing in the scrums. This was after their captain, Sam Warburton, was sent off early in semi-final against France.

However, with the perceived benefits of diving in soccer it does encourage players to even practice this activity. This reminded me of a great advertisement run by the Guardian Newspaper for the Euro 2004 Soccer Cup – see below