What can sport learn from economics and economics from sport?

At first glance, it may seem that economics and sport are of little relevance to one another. But economic analysis can inform big sporting decisions from signing players to specific plays to performance assessment; while sport can shed light on fundamental economic questions.

If you look closely at your favourite sport nowadays, it is hard to miss the influence of economics. Its impact is evident from the way that players are drafted or how much they are paid, through to individual coaching decisions and even strategic shifts across entire leagues.

This trend has been particularly driven by the rise of game theory in economics. Game theory uses mathematical analysis (or models) to figure out optimal strategies, such as what pitches a baseball pitcher should throw, or whether football (American soccer) teams should pass more.

Sport lends itself to economics and game theory because players, coaches and agents act in similar ways to the hypothetical rational decision-makers in economic models.

The economics of professional sport

If you have seen or read Moneyball, you will understand how economics can be used to put together a team.

This is the story of Billy Beane, the former general manager of the Oakland Athletics baseball team, who became famous for using economic ideas to identify undervalued players. The book was later turned into a film starring Brad Pitt as Billy Beane and Jonah Hill as his mathematics whizz-kid assistant.

Previously, baseball scouts and agents often focused too much on unimportant factors like how hard someone could hit a ball. By using advanced statistics, Beane could identify players undervalued by his competitors and play them in ways that made best use of their strengths.

Similarly, in basketball, US economist Robert Tollinson is largely behind the explosion of three-point shooting in the National Basketball Association (NBA). Tollison’s research identified that even though three-pointers were less accurate than other shots, over the course of a game and season, it made sense to aim for more of them.

In other cases, economists have been hired to solve specific problems. For example, the Australian Football League (AFL) was worried about clubs ‘tanking’ (purposefully losing) to get favourable draft picks. So, the AFL asked Melbourne University economics professor Jeff Borland to come up with an objective measure of club performance. Borland’s measure included team performance, win-loss ratios, previous finals appearances and injuries.

Why are academics getting into sports?

For teams and leagues, the incentive to implement economic ideas is financial. The Super Bowl – the championship game in the US National Football League – attracts 100 million plus viewers each year in the United States alone.

In Australia, the broadcast rights for the AFL and National Rugby League (NRL) are each valued in billions of Australian dollars over the life of a six- or seven-year contract.

So these games involve big money and this doesn’t count the merchandise that can be sold to fans.

But academic economists are often driven by something else: analysing sports can shed light on fundamental economic questions. In particular, this analysis can provide insights on competition, the impact of incentives, and labour market discrimination along lines of race and gender.

For example, discrimination against non-white athletes like Hank Aaron in major league baseball (MLB) led to a lot of interesting research about the economics of discrimination in the workplace.

Similarly, the rapidly increasing player salaries in the English Premier League have led to a lot of analysis of ‘winner-takes-all’ markets. This has also led other professional sports leagues to implement salary caps and restrictions on the draft.

But the economics of sports is not just for academics, teams and leagues. The past few years have seen a few popular books that explain how fans can get in on this movement.

For example, there’s Soccernomics by Simon Kuper and Stefan Szymanski. This book applies statistics, economics, psychology and game theory to popular questions about the game. A few spoilers: which country likes soccer the most? Norway. Which country has historically performed better at the World Cup than it should have? England (despite its reputation).

There is also Franklin Foer’s How Soccer Explains the World, which uses football to explain topics as diverse as globalisation, oligarchy and anti-semitism.

Lawrence Ritter – an eminent economist – is arguably more famous for his book The Glory of Their Times, about the early days of America’s MLB than much of his other work. There has probably been no better book on the sociology of business and the labour market of the United States in the 1920s.

More recently, my book Footynomics and the Business of Sport looks at sport-mad Australia and the huge investments in sport made in recent years with the World Cup and the Olympics.

Australia is a country that’s not only keen on participation in sports but also in terms of watching and celebrating sport. Not many countries have a public holiday devoted to a horse race, but Australia does.

Australia is also unique in having four codes of football – Australian rules, rugby league, rugby union and soccer – battling it out for players, fans, sponsors and media time in a fiercely contested market. And that’s even before we get to cricket, tennis, athletics and the rest.

This highlights the importance of sport to Australia, its economy, economic wellbeing and even trade – all of which are discussed in Footynomics.

The bottom line

The growth in sports economics is likely to continue, as the data get better and teams compete for a strategic edge. Further, the more money that goes into professional sport, the higher the stakes. In economic terms, the sports industry really is more than a game.