And of course because sports create big economic risks and opportunities!
A couple great posts from the always interesting Sports Economist recently asked the question “why study sports economics?” adding to a (not quite top ten) list written by Justin Wolfers:
1. Sports provide unique opportunities to test economic theories.
2. Sports shapes broader national debates.
3. Professional sports are an important part of the economy.
4. Sports participation is an important activity.
5. Sports provides a useful teaching metaphor.
6. Doing research on sports is fun.
Earlier they highlight the relevance of the 2007 Nobel Economist’s work for sports markets:
OK, not quite, but the work of Leonid Hurwicz, Eric Maskin and Roger Myerson has much relevance to sports economics and the design of sporting contests such as leagues, championships and so on. Their key insights relate to the design of mechanisms when agents have private information. The economic framework for analysing these problems (e.g. ensuring that rules are “incentive compatible”, i.e. the payoff to breaking them is not greater than obeying them) was laid down by these guys, and insights into the regulation of monopolies and so on were important consequences of their work. It’s not hard to think of a whole host of current sports issues to which their work is relevant: incentives and revenue sharing; creating mechanisms to prevent match fixing; doping. Moreover, the notion of a sports competition itself can be thought of as a mechanism designed to elicit maximum effort from contestants.
I’m looking forward to learning more about Mechanism Design Theory as it would seem to have particular relevance in an emerging “age of markets”.
Serendipity of course took me to these posts (I check Sports Economist every few weeks to catch up) on the same day I first learned about Lewis Hamilton’s plan to list himself on the stock exchange (from the Independent):
The innovative move could see the racing driver list a minority stake in a company in which he would be the main asset and remain the major shareholder. Several US sports stars are considering similar proposals, including Derek Jeter, the star batsman at the New York Yankees baseball team.
Hamilton’s multimillion pound salary from McLaren, his F1 team, is set to be dwarfed by the sums earned from endorsing and promoting products. If he chose to pursue a listing on the AIM market in London, he could, for example, sell a 10 per cent stake in Lewis Hamilton plc, for $100m. Investors in the company would be paid a dividend equivalent to 10 per cent of Hamilton’s total future earnings. The company would be structured like any other listed vehicle with a board of executive and non-executive directors.
By pursuing a listing, the driver would be able to safeguard his financial future at the start of his career by pocketing a large lump sum. The plan could be attractive to Hamilton because it would reduce the financial downside of any injury that might prematurely end his racing.
Readers won’t be surprised to hear that I think this is an excellent and interesting idea worth pursuing and if he goes ahead, will be yet another step in legitimizing sporting risk as the real and relevant (non-correlated) asset class that it is; I certainly didn’t predict Lewis in AmazonBay but this is exactly the kind of possibility I wanted to draw attention to with my rather far-fetched metaphors in the film. Of course, if Lewis PLC goes ahead and floats, one should expect trading volumes on F1 markets at Betfair and other sports exchanges to pick up considerably, especially on race days (think Treasury futures when “the numbers” – non-farm payrolls, GDP, etc. – come out). If I were the bank underwriting (and subsequently making markets) in these shares, I would make damn sure that my management and risk limits allowed me to trade the underlying F1 markets on Betfair etc. Of course this is not completely new – many football teams have had public listings; however I suspect Lewis PLC would be a much cleaner test of the relationship between economic risk and the underlying sporting outcomes given the lower basis risk (fewer variables.) And there should be plenty of both “end-users” (shareholders, sponsors, broadcasters, etc.) and speculators to provide liquidity to both the shares and the outcome markets.
My only regret is that I’m not in a position (yet!) to pitch for Mr. Hamilton’s business as an underwriter or financial advisor. Although I would be happy to advise him strategically (if any readers are close to his management please forward this post to them!)
(More recent posts on sports risk management here.)
*Note: The Independent article above mentions that US baseball star Derek Jeter has contemplated a similar idea. Given that he plays a team sport, the basis risk between his performance is higher than for someone like Lewis Hamilton and depends to a large extent on where he plays – both in terms of “is the team good?” and “is the (media) market big?” Furthermore given the ridiculous criminalization of sports trading in the US, any market-maker in Jeter Inc. would be hard-pressed to legally hedge their book. Of course, if they had a UK office they could potentially get around this but without US retail participation, I doubt Betfair or any other exchange would have a liquid market in baseball risks. Then again, maybe this is just the ticket to plow through sensible legislation and regulation of sports trading through Congress; if Goldman Sachs and Merrill Lynch are doing the asking, maybe Senator/President-elect Clinton will put her name on the bill!
