The Future of Behavioral Economics in Sports
Economics Research
Brad R. Humphreys
West Virginia University
Keynote Presentation
7th ESEA Conference on Sport Economics
Zurich, Switzerland
27-28 August 2015
B. R. Humphreys (WVU)
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Introduction
Opening Remarks
Agenda
Not an “Intro to Behavioral Economics” lecture
Selective literature review - examples of papers in sports economics
using behavioral concepts
Discussion of areas I think are likely to be fruitful for applying
behavioral concepts
I hope to convince you that sports economists should pay more
attention to behavioral econ concepts than we currently do
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Introduction
Opening Remarks
What is Behavioral Economics?
Standard economic models emphasize rational choice: fully informed
agents make utility/profit/revenue maximizing decisions given
time-invariant preferences; these decisions are not influenced by other
factors
Standard economic choice models provide clear predictions and enjoy
substantial empirical support
However, in some areas, outcomes appear to differ systematically
from the predictions of standard choice models
Behavioral economics uses insights from psychology to explain these
systematic differences
Area has come a long way since “satisficing” and now includes
rigorous models that generate specific predictions
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Introduction
Opening Remarks
Where we have been and where we should go
Sports economics has a curious relationship to behavioral economics early adopters of a few behavioral ideas (the Hot Hand, Sentiment
Bias, Favorite-longshot Bias) caught on, led to much additional
research, followed by general lack of interest in other behavioral
concepts
B. R. Humphreys (WVU)
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Introduction
Opening Remarks
Where we have been and where we should go
Sports economics has a curious relationship to behavioral economics early adopters of a few behavioral ideas (the Hot Hand, Sentiment
Bias, Favorite-longshot Bias) caught on, led to much additional
research, followed by general lack of interest in other behavioral
concepts
I find this both odd and interesting
B. R. Humphreys (WVU)
ESEA Keynote 2015
27/08/2015
4 / 25
Introduction
Opening Remarks
Where we have been and where we should go
Sports economics has a curious relationship to behavioral economics early adopters of a few behavioral ideas (the Hot Hand, Sentiment
Bias, Favorite-longshot Bias) caught on, led to much additional
research, followed by general lack of interest in other behavioral
concepts
I find this both odd and interesting
Sports economics is filled with research topics that appear to be well
suited to the application of behavioral concepts and seminal papers in
behavioral economics used sports to motivate the research
B. R. Humphreys (WVU)
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Existing Research
The Hot Hand
Hot Hand research in sports economics
Context: Kahnenman and colleagues identified biases in perceptions
of random events as an important behavioral concept as early as the
1970s - the Law of Small Numbers
Original research focused on free throw shooting in pro and college
basketball
Sports economists seized on this idea almost immediately, currently a
large, ongoing literature focusing on the Hot Hand in match
outcomes and betting markets
No need to summarize this research . . .
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Existing Research
Favorite-Longshot Bias
Favorite-Longshot Bias research in sports economics
Context: Early tests of informational efficiency in markets used data
from sports betting, especially horse race betting
Evidence showed one clear irregularity: bettors over bet long shot
horses relative to favorites, even in parimutuel betting, that cannot be
easily explained by standard models of choice under uncertainty
Sports economists seized on this idea almost immediately, currently a
large, ongoing literature focusing on the Favorite-Longshot Bias in
many betting markets
No need to summarize this research . . .
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Existing Research
Sentiment Bias
Sentiment bias research in sports economics
Context: Investor sentiment refers to cases when asset prices differ
from the PDV of future cash flow/earnings and this difference cannot
be arbitraged away.
One explanation for this is behavioral biases in investor decisions
(Hirshleifer “Investor Psychology and Asset Pricing” J. Finance 2000)
Economists used data from sports betting markets to test this idea
almost immediately, currently a large, ongoing literature
No need to summarize this research . . .
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Reference Dependence
Concepts
Behavioral Concept: Reference dependence
Reference Dependent Preferences (RDP): Utility depends on both
standard consumption utility and “gain-loss” utility that depends on
deviation between actual experience and some reference point
Loss aversion: Marginal utility of negative deviations from reference
point larger than marginal utility of positive deviations. This concept
rooted in Prospect Theory
The Endowment Effect: People ascribe more value to things simply
because they possess them. Manifestation of RDP and loss aversion
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Reference Dependence
Existing Research
Selected Sports Econ Papers using RDP/Loss Aversion
“Can Losing Lead to Winning?” (Man Sci 2011) Not cited in JSE.
“Is Tiger Woods Loss Averse? Persistent Bias in the Face of
Experience, Competition, and High Stakes” (AER 2011).
“Reference-Dependent Preferences, Loss Aversion and Live Game
Attendance” (Economic Inquiry 2014)
“Sticking with What (Barely) Worked: A Test of Outcome Bias”
(Management Science 2015).
“Reference-Dependent Preferences, Team Relocations, and Major
League Expansion” (JEBO 2015)
Summary: Professional athletes’ and team managers’ decisions
consistent with loss aversion; managers do not update strategic
decisions in a way consistent with standard choice models; fans are
loss averse and teams exploit this.
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Reference Dependence
Suggestions
Future Research: Secondary Ticket Markets
“Focusing on the Forgone: How Value Can Appear So Different to
Buyers and Sellers” Carmon and Ariely Journal of Consumer Research
2000.
Selling price for NCAA Final Four basketball ticket (WTA = $2,400)
14 times higher than buying price (WTP = $170).
Growing literature on secondary ticket markets in sports. This paper,
and this classic, textbook example of the endowment effect,
completely ignored in secondary ticket pricing literature.
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Reference Dependence
Suggestions
Future Research: League Design Issues
Coates, Humphreys and Zhou EI 2014: the classical UOH does not
describe attendance outcomes
Fan’s decisions suggest home win preference and tastes for upsets
This only happens if there are dominant teams and relatively wide
dispersion in team quality
Standard league models use the classical UOH to explicitly motivate
revenue functions that are concave in winning percent/talent
Fan RDP/loss aversion may imply non-concave revenue functions,
depending on composition of league
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Reference Dependence
Suggestions
Future Research: Team Ownership Forms
Stigler and Becker (1977) have argued in their seminal article that the utility,
which a consumer is able to derive from the present “consumption” of
certain goods, depends on the “consumption capital” accumulated by this
actor through previous “consumption” of these goods.
Genuine football fans following the games and activities of “their” club
sometimes for their whole life are perhaps the perfect incarnation of this
theory of beneficial addiction. Presumably a true fan with all the
accumulated context knowledge enjoys a remarkable game of his club more
than an occasional spectator coming along incidentally. Moreover, fans of
the same club enjoy interacting in a group of like-minded people, for
example, by sharing the joy of a great performance.
- Egon Franck, Keynote lecture, First ECSE, Paris 2009
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Reference Dependence
Suggestions
Future Research: Team Organizational Forms
Clear behavioral basis (Is addiction “rational”? Theory and evidence,
QJE 2001)
Humphreys & Zhou, “The Hold-Up Problem, Reference-Dependent
Preferences, and Ownership of Professional Sports Teams” formalize
this idea using RDP/loss aversion
Focus on durable fan investment in team and how this generates a
hold-up problem
Approach has many implications for understanding fan behavior, team
ownership, and league governance
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Present Bias
Existing Research
Behavioral Concept: Present bias
Present bias: Tendency to over value immediate events relative to future events; AKA
hyperbolic discounting, time inconsistency
ut current utility, individuals care about current and future utility, make decisions in
period t that affect current and future (ut +1 , ut +2 , . . . , uT ) utility
Standard economic model uses exponential discounting
T
U t (ut , ut +1 , ut +2 , . . . , uT ) =
∑ δ τ uτ
τ =t
Discounting future utility by δ is time-consistent in that a person’s relative well-being at
any date relative to a later date is always the same
Under time-inconsistent preferences:
T
U t (ut , ut +1 , ut +2 , . . . , uT ) = δt ut + β
∑
σ τ uτ .
τ =t +1
β, which is applied to all future periods, reflects “present bias”
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Present Bias
Existing Research
Implications of present bias
Excessive preference for gratification now at the expense of future
gratification - this happens often in sport context
Also applicable to cases where costs are immediate and benefits
delayed: exercise/participation in physical activity
Approach has been criticized on ground that a present biased person
would know their future self will be present biased and act accordingly
Issue is addressed by models of naivety, which allow for different
forecasts of β in the “beta-delta” model
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Present Bias
Existing Research
Sports econ papers using present bias
Almost non-existent
Much of the (small) existing literature focuses on gym/health club
contracting issues - covered in next section
Humphreys, Ruseski and Zhou “Physical Activity, Present Bias, and
Habit Formation: Theory and Evidence From Longitudinal Data”
Summary: observed patterns of participation in leisure time physical
activity reflect habit formation, present bias; other factors like naivety
and over confidence likely affect the decision; cross sectional data
cannot easily reflect the effect of these factors.
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Present Bias
Suggestions
Future Research: Present Bias
Wide open area in sports economics
Topics where consumers, teams, or leagues weigh present benefits or
costs against future benefits or costs
Rebuilding teams and resigning veterans versus signing prospects:
involves trading off success now for success later
Sports labor supply: the decision to become a professional athlete
required years of training (time, opportunity, and monetary costs)
before large salaries realized
Hosting sports mega events
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Behavioral Contracting
Existing Research
Behavioral Concept: Behavioral Contract Theory
Behavioral economics initially focused on alternative models of
consumer and producer choice, but until recently, the implications for
optimal contracting were not emphasized
Optimal contracting is a mature literature, much based on decisions
in the standard rational choice framework
Recent research has begun to incorporate behavioral econ concepts
into standard optimal contracting models
Includes research on health club/gym contracts related to sports
economics
This growing literature features exploitive contracts that are designed
to take advantage of systematic mistakes driven by behavioral factors
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Behavioral Contracting
Existing Research
Sports econ papers using behavioral contracting
“Paying not to go to the gym” AER 2006 (1 citation in JSE)
“Incentives to exercise” Econometrica 2009 (not cited in JSE)
“Naivete, Projection Bias, and Habit Formation in Gym Attendance”
Management Science 2015
Summary: Habit formation, naivety, overconfidence and projection
bias all paly important roles in decision to exercise. Gyms offer
contracts that exploit individual’s tendency to systematically
over-estimate how their future selves will behave
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Behavioral Contracting
Suggestions
Future Research: Behavioral contracting
Contracting issues are widespread in professional and intercollegiate
sports
Small literature on shirking in long-term employment contracts, but
little additional research in this area
Detailed information available about employment contracts in sport this can be exploited in the context of behavioral contracting models
Deferred compensation versus up front bonus payments
Projection bias: individuals tend to over-estimate future productivity.
Do teams systematically exploit this by offering larger performance
bonuses and less guaranteed salary?
Are season ticket, mini-season packages offered by teams consistent
with predictions from exploitive contract literature?
Other regarding preferences and salary discounts to play for a
successful team
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Conclusions
Experiments
Experimental Economics
Experimental economics closely linked to behavioral - many early
influential behavioral econ papers used stated preference (response to
hypothetical questions) data
More recently, laboratory experiments have replaced stated preference
approach, these often use undergraduate students as subjects
But evidence “from the field” also plays an important role in
behavioral economic research, and sports represents the ultimate “in
the field” setting
We do not have to conduct behavioral economic laboratory
experiments to do behavioral economics
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Conclusions
Final Thoughts
The Future of Behavioral Sports Economics
With a few notable exceptions (Hot Hand, Sentiment Bias,
Favorite-Longshot Bias), sports economists have largely ignored
behavioral economic concepts
Recent research shows how important concepts in sports economics
can be explained using behavioral concepts: UOH, fan investment and
team ownership, choice of gym contracts
Behavioral concepts especially useful for understanding decisions
under uncertainty - these decisions are very common in sports setting
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Conclusions
Works Cited
Works Cited I
Hirshleifer, D. (2001). Investor psychology and asset pricing. Journal
of Finance, 1533-1597.
Berger, J., & Pope, D. (2011). Can losing lead to winning?.
Management Science, 57(5), 817-827.
Pope, D. G., & Schweitzer, M. E. (2011). Is Tiger Woods loss
averse? Persistent bias in the face of experience, competition, and
high stakes. The American Economic Review, 101(1), 129-157.
Coates, D., Humphreys, B. R., & Zhou, L. (2014).
ReferenceDependent Preferences, Loss Aversion, and Live Game
Attendance. Economic Inquiry, 52(3), 959-973.
Lefgren, L., Platt, B., & Price, J. (2014). Sticking with What
(Barely) Worked: A Test of Outcome Bias. Management Science,
61(5), 1121-1136.
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Conclusions
Works Cited
Works Cited II
Humphreys, B. R., & Zhou, L. (2015). Reference-dependent
preferences, team relocations, and major league expansion. Journal of
Economic Behavior & Organization, 109, 10-25.
Carmon, Z., & Ariely, D. (2000). Focusing on the forgone: How value
can appear so different to buyers and sellers. Journal of Consumer
Research, 27(3), 360-370.
Gruber, J., & Koszegi, B. (2001). Is addiction ’rational’ ? Theory and
evidence. Quarterly Journal of Economics, 116(4).
“Physical Activity, Present Bias, and Habit Formation: Theory and
Evidence From Longitudinal Data”
http://www.ualberta.ca/~econwps/2015/wp2015-06.pdf
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Conclusions
Works Cited
Works Cited III
DellaVigna, S., & Malmendier, U. (2006). Paying not to go to the
gym. The American Economic Review, 694-719.
Charness, G., & Gneezy, U. (2009). Incentives to exercise.
Econometrica, 77(3), 909-931.
Acland, D., & Levy, M. R. (2015). Naivete, projection bias, and habit
formation in gym attendance. Management Science, 61(1), 146-160.
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