Last summer Paul Krugman discussed two academic models designed to tell us the impact a fiscal stimulus package would have on the nation's economy. In discussing these conflicting models, Krugman observed:
Bear in mind that all these models assume perfectly rational, perfectly informed consumers engaged in optimal forward-looking behavior. Economists are in vast disagreement about the right model to use -- but consumers are assumed to know the true model, and base their spending decisions on that knowledge. Um, I think we have a problem here.
The assumption of perfect rationality has traditionally been made in economic models. And traditionally - despite the argument of Krugman -- it has not been thought of as a problem.
Recent research, though, casts serious doubt on this core assumption. Daniel Gilbert - in Stumbling on Happiness - argues that human beings don't exactly know what makes them happy. In Predictably Irrational, Dan Ariely presents evidence that human beings frequently fall short of the rational ideal. And in Nudge, Richard Thaler and Cass Sunstein show how once we understand that people are not perfectly rational better policies can be designed.
The research presented in these books is generally based on laboratory experiments. Although such experiments are persuasive, some people have argued - as Ariely notes - in the "real world" the results would be different. However, a host of studies - using data from the "real world" of sports --- strongly suggests otherwise.
For example, Michael Lewis - in Moneyball - presented evidence (that the academic work of Jahn Hakes and Raymond Sauer supports) that on-base percentage in Major League Baseball was historically undervalued. In The Wages of Wins, Martin Schmidt, Stacey Brook, and I present evidence that scoring in the NBA is overvalued. And these stories, are just the tip of the iceberg.
In Stumbling on Wins, Martin Schmidt and I review at least twenty examples - drawn from our research as well as the published research of other academics - of imperfect decision-making in the world of sports. One example is particularly relevant to the players participating in the NCAA tournament. We find that players who appear in the NCAA Final Four can see their draft position improve by about twelve spots in the subsequent NBA draft. But if the player returns to college and fails to appear in the Final Four the next season, the Final Four effect vanishes (so there is clearly an incentive to leave college early). Furthermore, there's no evidence that players who appear in the Final Four play better in the NBA.
Once a player enters the NBA, Colin Camerer and Roberto Weber present evidence that a player's draft position still impacts the allocation of playing time (even after one controls for performance) more than two years into a player's career. Such research - which other studies have confirmed - suggests that decision-makers in the NBA have a hard time letting go of an initial evaluation of a player. And that's true even if that initial evaluation - as the study of the impact Final Four appearances have on draft position suggests - is flawed.
The stories told in Stumbling on Wins are not only drawn from the NBA. We also review studies drawn from the data generated in MLB, the NHL, and the NFL. And as we note, although our list is extensive, it's far from complete (Soccernomics - by Simon Kuper and Stefan Szymanski - provides a number of examples drawn from professional soccer).
Given the nature of sports, one should expect decision-makers to approximate the perfectly rational ideal. Unlike many industries, sports have an abundance of data to evaluate worker productivity. The decision-makers also have very clear incentives and severe consequences when decisions go badly. Despite the nature of the industry, though, study after study reveals that people in sports are not perfectly rational.
So why is this important? Sports are typically thought of as just a diversion from real life. Sure, we love to discuss that latest free agent signing or who our favorite team is going to take in the draft. But those topics are not considered "important". As one can see in How Markets Fail (by John Cassidy), The Myth of the Rational Market (by Justin Fox), and Animal Spirits (by George Akerlof and Robert Shiller), understanding how people make decisions is crucial to understanding how the economy functions and the effectiveness of public policy.
In Stumbling on Wins, we argue the study of decision-making in sports helps us understand human decision-making. So the next time you debate who is better on the field of play, remember, this debate tells us something about how human beings see and understand the world. And that story is truly quite important.
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