THE BLOG
07/29/2010 04:04 pm ET Updated May 25, 2011

Why Macroeconomists -- and Some Politicians -- Should Watch Sports

Britt Robson of CNNSI.com recently wrote a column examining the worst offseason moves in the NBA. A perusal of the list reveals some familiar patterns. Decision-makers in the NBA have given significant dollars to scorers like Amare Stoudemire, Joe Johnson, and Rudy Gay. Darko Milicic -- a player whose "size", "youth", and "potential" hasn't vanished yet -- received $20 million from the Minnesota Timberwolves. Such moves illustrate documented biases in decision-making in the NBA. Specifically, scoring is overvalued and teams have trouble abandoning evaluations made during the NBA draft.

These moves, though, also tell a different story. The column Robson offered is essentially written by sports writers each off-season in the NBA. In fact, similar columns are written in the off-seasons of each sport. Year after year, sports writers -- and of course, the fans -- are convinced decision-makers in sports are getting it wrong. Now sometimes the writers -- and of course, the fans -- are incorrect. But published research in economics makes it clear that some of the criticism of decision-makers in sports is on target. People in sports will make the make the same mistakes over and over again (shameless self-promotion -- Martin Schmidt and I report many of these stories in Stumbling on Wins).

Obviously these stories are important to sports fans. But these stories also inform our understanding of macroeconomic policy.

Yes, I know. That seems like quite a leap. A quick review of recent Congressional testimony by Nobel Laureate Robert Solow provides us with the connection.

Solow's testimony -- "Building a Science of Economics for the Real World" -- focused on how certain macroeconomic models inform the economic policies some people prefer. Here is a quick summary of what Solow had to say:

  • Certain macroeconomic models -- specifically the DSGE models -- are based on the idea that the economy is comprised entirely of rational people.
  • An implication of this approach: The DSGE story -- as Solow emphasizes -- "has no real room for unemployment of the kind we see most of the time." In the DSGE world, the unemployed are people who are rationally volunteering to avoid work; because of a preference to consume more leisure or a desire to retain some flexibility for the future. In other words, there is no involuntary unemployment.
  • Because everyone in the economy is rational and making the best decision given their circumstance, there is no room for government policy. In other words, stimulus packages and unemployment benefits are not necessary in the DSGE world. In fact, these policies can only make things worse.

So if you believe people are perfectly rational, it leads you to a certain set of policies. But are people perfectly rational? Behavioral economists and cognitive psychologists have offered ample evidence from laboratory experiments that people are not perfectly rational.

Sports fans, though, can see that these experiments may not have been necessary.

To be clear, people who work in sports are not stupid. Decision-makers in sports are generally very educated and well-trained for the industry where they are employed. Furthermore, these decision-makers have an abundance of information and very clear incentives. Specifically, when you get it wrong in sports, you not only get fired, you also are the subject of public ridicule. In sum, if there was an industry where decision-makers should be perfectly rational, the sports industry should be it.

But people in sports are not perfectly rational. Again, scoring is consistently overvalued by NBA decision-makers. Furthermore, on draft night, NBA decision-makers place too much emphasis on Final Four appearances and not enough emphasis on rebounding. And the NBA is not the only place where decision-making has problems. In the NFL, Cade Massey and Richard Thaler have offered evidence that first round draft picks are overvalued; while David Romer has emphasized that coaches have problems with decision-making on fourth down. In Soccernomics - by Simon Kuper and Stefan Szymanski - evidence is presented that decision-makers in soccer make systematic mistakes. One of my favorites: Kuper and Szymanski argue that scouts overvalue blond soccer players.

And let's not leave out baseball and hockey. In baseball, decision-makers historically undervalued on-base percentage and over-valued stolen bases. And on the ice, Stacey Brook and I have published research that argues the performance of goalies is not quite as different as their salaries would suggest.

The examples cited are but a sample of what we find in the academic research. And one suspects that fans of any team can find more examples just thinking about the decisions made by their favorite team.

Despite this evidence, some macroeconomists insist that decision-makers are perfectly rational. This suggests that these people are simply not sports fans. So if you meet one of these macroeconomists, please take them to a game. Remember, some policy makers listen to these economists. And maybe the advice they give would improve if they spent less time playing with DSGE models and more time watching sports.