Joe Nocera's Dog Just Won't Hunt

Joe Nocera, eminently readable as always, starts from a fundamental premise that powerful college sports-oriented alumni always win against the academic side ("Books vs. Games", NYT, May 12).  Of course there are other elements in the sports constituency than just alumni, but I digress.

Nocera reels off a number of truths that he holds to be self-evident:

"... the athletic department's out-of-control costs..."
"...Rutger's athletic department has consistently run large deficits."
"...money that might have gone to professors’ salaries or other academic needs."
"...took it out of the hide of the students themselves."

Hammering the point home on books vs. games:

"It [Rutgers] is responsible for educating 65,000 students. Why isn’t that more important that (sic) competing in the Big Ten?"

As the final nail in the coffin:  "Why does the tail always wag the dog?"

But as Jason Winfree and I point out in our 15 Sports Myths (Stanford U. Press, 2013), there is a much more productive explanation of the relationship between university administrators and their athletic departments.  Universities actually do both books and games and carefully weigh value and cost margins in making their spending decisions on each.  The choice by university administrators to put relatively small amounts of money into their athletic departments pays off in relatively small ways, but typically with a believable and legitimate return if you look in the right "spot" (only mild apologies for the doggy pun).

Compared to this alternative economic and policy description, the "tail wags the dog" belief is a dog that won't hunt.

Rather than just spending what it wants with university administrators close at hand with the poop bag, actual budget hearings place the athletic department in the same setting with the rest of the programs at the university.  The allowed spending decision comes first, then the spending.  And that budget is then overseen by the Board of Regents, the Governor, and then on to the legislature.  The athletic department is as controlled in its spending as any other program on campus.  [This may cause chuckles among those dissatisfied with the spending control over universities, generally, but that doesn't distinguish the athletic department on this dimension in any way.]

In an assertion begging justification, Nocera simply names the difference between generated revenues and actual expenditures a "deficit".  But this "deficit" actually represents the administrators' determination of the added amount of money they wish to spend in order to have their athletic program at its desired size and scope.  As it goes, the current level of administrative spending at Rutgers is around 25%  of the total (it has not always been that way, and last year's level is higher, which is why Rutgers is interesting).  However, especially during a conference transition, this is not uncommon and administrators expect to see a return on that investment.  If things go at Rutgers as they have elsewhere, they will, as Winfree and I have documented for all of college sports.

Next up for Nocera:  The administration's portion represented "...money that might have gone to professors’ salaries or other academic needs."  Having already ignored the budgeting process within the university, might as well ignore the rest of the budgeting process beyond the university!  Administrators decide the right level of spending at their university, tote up research revenues, ask their legislature and other funding sources to cover the rest, and spend the proceeds according to their request.  If $20 million or so for athletics is granted, and then administrators spend it on something else, they will have some explaining to do in the next budget round.  If university administrators tried to spend the allocation to athletics on academics, as Nocera suggests, it is likely that the next go-round would see $20 million or so less in the Rutgers budget.  Budgeted funds are simply not always as fungible across different purposes as many believe (desire?) them to be.

And taking it out of the hides of students is also an assertion outside reality.  Student fees go to fee-backed student activities, and the distribution of that budget is determined by student government.  So, actually, student government spends the money on athletics because that is the (admittedly never perfect) reflection of the self-assessed welfare of student government leaders.  Usually, this is also the source of the lower-price ticket quid pro quo.  Yes, I recognize the imperfect nature of the reflection of the preferences of some students.  But that is hardly unique to this little democracy.

Besides, we're really just not talking about all that much money from the overall Rutgers budgeting perspective.  Nocera reports $183 million through 2022.  Taking that to mean 7 years, that's $26 million on average.  Nocera also reports Rutgers' annual budget is $3.6 billion.  So, that's .026/3.6 = 0.7% on athletics (yes, less than 1%).

As to the faculty response, let's turn to just the 27.6% of budget, or $994 million, that goes to instruction (and ignore all of the other spending on students like housing, dining, aid, services, share of library and plant operations, etc.; see Rutgers budget description).  First, again, that's 26/994 = 2.6% and relatively speaking just not very large.  But, second, $26 million is $26 million and we are a jealous lot.  Any dollar going to anything except what we cherish (usually our own program and our own salary) is mis-spent.  And all of us would like $20 million added to our favorite.  Alas, third, as noted above, that $20 million or so a year isn't really ever going to go to our heart's desire in the first place.  Benefactors agreed to spend it on athletics, not on us.

So, university administrators balance books and games, just as they balance economics books against sports management books against everything else that the university is expected to do.  All of the dogs line up to be fed and they are, each according to their contribution to the goals of university administrators--research, teaching, and service.  They each have also already wagged their tails and their ration is the result of that demonstration.  The academic side does mostly research and teaching, and the sports side does mostly service.  But all are valuable to university administrators which is why they "feed" them all in the first place.

Pitting one against the other misses the point of just what it is that universities are up to in the first place, fomenting conflict along the way.  And to what end?

Before We Get Too Carried Away with the 8-year Project Royals...

Announcers are not sports economists, so I don't hold this too much against Rex Hudler (guest announcer on the Tigers game the other day).

Hudler went on a bit about how the KC Royals should not be such a surprise.  According to Hudler, the team was eight years in the making with careful strategy/moves etc. by sharp management.

No doubt; Kendrys Morales is really coming through for example, and some low-salary pitchers are going great guns so far.

But let's not forget this:

2011- Royals ranked last (30th) in MLB payroll at $36.1M.  They also received $29M in revenue sharing to take into...

2012 - Royals move up to 27th in MLB payroll at $60.9M.  If the increase of $24.8M all came out of previous revenue sharing, that would still leave $4.2 M.  The Royals received $16M in revenue sharing at the end of 2012, so their revenue sharing account now contained $20.2M.  And we're off to...

2013 - Royals move up to 22nd in MLB payroll at $80.5M.  If the increase of $19.6M all came out of previous revenue sharing, that would still leave $600,000.  The Royals received $36M in revenue sharing at the end of 2013, so their revenue sharing account now contained $36.6M.  And we're off to...

2014 - Royals move up again to 19th in MLB payroll at $92M. If the increase of $11.5M all came out of previous revenue sharing, that would still leave $21.1MM.  I could not find any published report of revenue sharing for 2014 (and a quick check with guru Maury Brown - @BizBallMaury - informed me that even devout followers cannot find the data anymore).  But don't let that us stop us...

2015 - Royals move up to 16th in MLB payroll at $113.6M.  The increase was $21.6M.  Given the $21.1M left last year, and given that net sharing to the Royals was surely positive in 2014, it appears a truly trivial amount came out of the 2014 share to get to this payroll level.

So, net revenue sharing proceeds for the Royals more than covered the 33% per annum nominal growth in payroll observed over the last few seasons.

Indeed, nearly all of 2014 net sharing must have gone into other player development expense, since that is required under the CBA and monitored by the Commissioner's office, and reviewable by the players.  At least in the case of the Royals, it looks like revenue sharing has done its job.  [I haven't looked at any other teams and this need not be true in all cases, as many others have argued in terms of "revenue sharing freeloaders" or some such.]

It takes sharp management to get where the Royals are today with pretty close to the median payroll.  But let's not forget that their payroll has dramatically increased, as tempting as it is to attribute it all to outstanding management on and off the field.

Sports Econmics: JEL Recognition and a Reminisce

So, sports economics has its own JEL codes.  In addition to other paths I have followed to sports economics publication (e.g., the “L-path” in Industrial Organization), there is now a “Z-path”.

I join the current leadership in sports economics—Peter von Allmen and Dave Berri— hailing the new JEL codes as overdue recognition of the area.  But I’m also sure the codes are a mixed blessing (note that sports economics is under "Specialty Topics" as Z2, that is, the second specialty topic after Cultural Economics, probably with more to come).  The Z-path does, indeed, recognize sports economics and that is nice.  But the codes also duplicate other paths (e.g., the L-path has an industry studies sub-specialty that includes sports).  The Z-path also codifies the “sub-specialty” path many journal editors tell us to take anyway, back to our specialty journals.

Whatever.  The new codes won’t change my approach to sports economics at all and I wonder if they will for anybody else?  For me, the new codes will just make it easier to identify some of my work for the editors at the JSE and IJSF, for example.

The JEL accomplishment does do one thing for me.  It reminds me of the continual progression of sports economics from some pretty humble origins.  My thanks go to Joel Maxcy and Bruce Johnson for their help on the following recollections.

Larry Hadley (I miss him) and Elizabeth Gustafson organized the first WEAI sessions at the San Diego Sheraton on Harbor Island in 1995.  They hosted a cocktail party in a suite at the Sheraton and we remember it being pretty crowded, but joint recollection dredges up only Larry, Elizabeth, Dan Marburger, Bruce Johnson, Bill Kaempfer, and yours truly.

Please let me know if you were there and I will update the recollection.  Thanks in advance.

The 1995 version was successful and Larry and Elizabeth continued on organizing sports economics sessions-- next at the Westerns in San Francisco in 1996 and Seattle in 1997.  By 1998 (Lake Tahoe), the sessions ran most of a day.  I know, pretty small compared to the all day/all conference sessions of today.

And they were very fruitful sessions that followed.  I remember especially the 2001 San Francisco meetings where I first met my long-time collaborator, Young Hoon Lee.  Our first paper was in, of course, EI (2005).  We now have nine pieces together, and a co-edited volume just out (The Sports Business in the Pacific Rim, Springer Verlag, 2015).  Like I said, fruitful indeed.

It is also worth noting the first sports economics professional association which still struggles on today, namely, the International Association of Sports Economists.  I recall completely the IASE founders, Paul Staudohar and Vladimir Andreff.  The early IASE activity brought together those who would later sort themselves out first into NAASE and, most recently, into EASE.

It continues to be an interesting progression.

Why Definitions Matter, Part 2: Demand or Quantity Demanded?

Here is my second installment on economic/business descriptive definitions and why they matter.  The first was on "bubbles".  Arguing for that distinction earned me the "pedantic" accusation on twitter from @patrick_hruby but he is just wrong, both in context and in label-slinging.  These types of distinctions are critical to communication; without them, we must always begin a conversation with, "What do you mean by that?"  And that seems inefficient and potentially quite confusing for no real reason.

Demand or Quantity Demanded?

This is an old favorite of economics professors and, judging from treatment in the press, always will be.  Just look at the two carefully:  "Demand" versus "Quantity Demanded".  They do not look the same and for good reason:  They do not mean the same thing!

Let's think about "demand" and "quantity demanded" in terms of what might be a current problem for college sports ADs, the recent decline in student attendance at football games.

If attendance falls off due to bad scheduling or ever-more-enticing TV viewing, that's a decrease in Demand.  The language is reserved for a change in attendance even at the same price, where it follows that attendance has changed at all prices that could be charged.  Responses to this type of decrease are aimed at changing Demand back to its previous levels:  If an AD brings in more air shows, flying rocket man for the pre-game, more blaring video boards, more extravagant half-time programs, or alters a non-market imposition on rights to student tickets, that is an attempt to change the product so that attendance will rebound even at the same price.  Again, if fans respond, that would be an increase in Demand.

[My friend and colleague Stef Szymanski recently turns this distinction to extremely good use by pointing out that rising EPL ticket prices will not drive fans away...when they are rising because fan demand is increasing in the first place!]

On the other hand, an increase in Quantity Demanded would follow a ticket price reduction to bring fans back, more people will come through the gate (it may take a dramatic drop as this type of consumption goes, but return they will).  The language is reserved for only the response of ticket holders to a change in the price of their ticket.  As price falls, more tickets are purchased.

The distinction is important because confusing the two descriptive definitions leads to less clear assessment of AD choices.  For example, different ideas about what to do in the case of a decrease in demand are made to appear in conflict when they are not.  One group might argue, "Lower ticket prices"; another might argue "Make the fan experience better".  Both will get more people through the gate, but with different consequences.

The Quantity Demanded for college football attendance appears quite unresponsive to price.  In such a situation, reducing price will lead to an increase in Quantity Demanded of tickets, but will also decrease revenue.  Enhancing the fan experience will require increased spending, but at the same time will increase revenue (if successful), that is, attendance will increase even at the same ticket price, an increase in Demand.

Again, to the press and casual fellow travelers, please do everybody a favor and keep this straight.  The difference between Demand and Quantity Demanded matters for judging AD choices.

Just What Do You Mean by "Bubble"?

I'm watching and reading and there is something a bit disturbing going on out there.  The language governing some economic/business outcomes in sports is being obfuscated.  Every sports price increase is a "bubble"; to fix college sports attendance demand woes, just lower price; dynamic and variable pricing are the same thing.  I can't tell whether this is just out of ignorance of well-known descriptive definitions or just sloppy use of these well-known descriptive definitions.  Maybe it is ion purpose in order to lend an added sense of urgency or judgement of the participants--people fall for bubbles, after all.  But I am concerned because the sports business can be confusing enough without this obfuscation.

Here is the first of three examples using my understanding of descriptive definitions (that match various authorities on the web).  The other two, and concluding remarks, are in subsequent entries.

Bubbles or Rising Asset Value?

A "bubble" originally described trading in an asset at higher volumes and/or price than was consistent with the ability of the asset to generate profits over time.  Eventually, a true bubble "bursts", that is, the asset's trading and price must eventually return to plausible and consistent levels based on the future return that the asset actually can generate.  In that sense, in a bubble, something is "wrong" with the asset price relative to its actual revealed value in the future.

Over time, at the level of a market or an entire economy, a bubble has also come to mean an economic cycle characterized by rapid expansion followed by a contraction.  Note especially the contraction part.

So, for a bubble, somewhere must be exaggerated expectations about the future growth of the asset value and those expectations must eventually be proven incorrect by a correction.  Now, expectations could just have been uninformed but they might also have been manipulated.

Thus, bubble logic makes us suspicious as we watch the price of the asset rise.  Pundits and market watchers may sound alarms that a bubble might be in progress.  But the seemingly unsupportable increase in price may actually be the revelation of a prolonged increase in fundamental value.  That is, the revelation that the value of some asset actually is increasing at a surprising rate.

So, a surprising increase in asset value might be a bubble, but not all increases in asset values are bubbles.  A bubble is not just a rise in the price of something.

The first bubble logic I saw misapplied was when MLB player salaries began rising at a surprising rate in the early 1990s.  "When will this crazy bubble burst?"  My response was that there was no bubble, it was just expanding cable network coverage and increasing venue revenues driving the rise in salaries.  In other words, it was easy to see salaries tied to an increase in the fundamental that creates that value in the first place--fan spending in the stadium and upward pressure on rights fees due to expanded cable coverage.

Lately, it's bubbles in franchise values and TV rights fees (again) despite the many historical instances where sports asset values have increased based on an entirely believable increase in an underlying fundamental.  [As far as I know, MLB player salaries have yet to decline.]  So, just saying some sports price rising over time is a bubble doesn't make it so.  And instilling in readers that any sports values that are rising over time all are bubbles, as if everybody paying higher prices is crazy, may make for good press but it is poor factual reporting.

So, to the press, please do everybody a favor and just note that prices of some sports properties are increasing for an interestingly long period of time (if that is even true) and then either 1) claim that bubbles sometimes, but not always, look like this so be alert, or 2) go ask somebody in the know to define a bubble and comment on whether or not the price in question is a bubble or not, and why.  And if you think the people involved with any asset are behaving in a crazy fashion, just say so; it doesn't take bubble logic to make that case.

Don't just state that an increasing price is a bubble and then have it go into the press-repetition process that imprints a potentially harmful false truth in the minds of readers.  Bubbles do suggest that participants have gotten carried away with themselves and some are bound to lose possibly large amounts.  But sometimes the value of sports assets just rise over time.

Kids Sports Should Be Kept In Their Place, Indeed

I was inspired to think about this again after reading Bruce Feiler's "There's no off in this season, Team Sports Are Taking Over Kids’ Lives" in the NYT. The article is nicely done and the point is important. The line quoting Pastor James Emery White, "Sports is a wonderful thing to do for kids, but it should be kept in its place", returned me to my time as a high school athlete, and the treatment of my own kids when they went through the same thing.  I also offered some thoughts in the press a while back and I thought I'd do a bit more on it.

I see and hear the following on occasion:  "At least we got a tuition break out of it." Other versions voice the actual pursuit of a "scholarship" as part or all of the point of kids’ sports. Some even voice pro pipe dreams (yes, pipe dreams, I watched a couple of athletes I played against go all the way through to the pro level and, trust me, your kid isn't good enough.)

These claims got me thinking.  How much money and time went into that pursuit?  We had our own youth athletes in football and swimming and the money costs are clear—memberships, fees, tournament fees, equipment, travel, “fundraisers” (that actually came mostly out of our pocket) and never forget the value of time. I can’t even look back and estimate the time spent by our kids and us.

And it gets even more expensive for the parents of more athletically talented kids. All of the preceding occur nearly year round, plus now there may need to be individual coaching, getting on the right "travel" (elite) teams, or into the right academy. Don't forget having to get into the elite private school where rules are more favorable to sports participation—good coaches are there especially in basketball and football.

It's pretty easy to see that the "get the scholarship" claim really can't make monetary sense for nearly anybody. [I'll return to a more complete consideration of other benefits later.]

We could start an analysis at any point in time, but I find it easiest to present for a youth athlete at the college entry point.  The net present value (NPV) of an upcoming four-year offer can be characterized generally as:

NPV = (aG – e)/(1 + i) + (aG – e)/[(1 + i)^2]

                    + (aG – e)/[(1 + i)^3] + (aG – e)/[(1 + i)^4]

Here, G would be a full ride, the Holy Grail.  But a grant-in-aid (the NCAA definition of an athletic "scholarship") can be partial (as all you baseball, women’s basketball, softball, and soccer parents should by know if you don’t already).  Let a be the offered portion of an annual full ride.  Since right now G is less than full cost of attendance, there will be out-of-pocket expenses, e.

So the numerator is just the annual net value of the offer.  The denominator brings the next four years back to present value using the interest rate i. I’m fully aware that all of the elements in the numerator under the summation can vary each year, but no harm is really done to the point I am trying to make by assuming they are constant over the four years. [Yes, I know that occasionally eligibility is longer (grad school) or shorter (by injury) but, again, I’ll sacrifice that characterization to make the point.]  So, with constant numerator:

NPV = (aG – e){1/(1 + i) + 1/[(1 + i)^2] + 1/[(1 + i)^3] + 1/[(1 + i)^4]}

If i = 5%, then the sum in braces is 3.55.

Let’s have G = $25,000 annually, say, good old State U, and e = $3,500 (the midpoint given what I read in the press coverage on the issue).  Using these choices, NPV becomes pretty tractable (and you can choose other values and do your own analysis if you like):

NPV = ($25,000a – $3,500)(3.55) = $88,750a – $12,425

We also need to include the fact that there is only a probability of getting an offer, let's call it p. Multiplying NPV by p gives Net Expected Value (NEV):

NEV = pNPV = p($88,750a – $12,425)

Let's run a few different scenarios on a and p. Let a and p both run to 1.00 in equal 0.25 increments. It's an easy Excel task to use the formulae to generate the following table of NPV and then NEV:

a	NPV	NEV p=.25	NEV p=.5	NEV p=.75	NEV p=1.0
0.25	$9,763	$2,441	$4,881	$7,322	$9,763
0.50	$31,950	$7,988	$15,975	$23,963	$31,950
0.75	$54,138	$13,534	$27,069	$40,603	$54,138
1.00	$76,325	$19,081	$38,163	$57,244	$76,325

Now, let's suppose you started “investing” in your kid’s sports prospects starting at age 9 (for us, that was the start of youth baseball and then on to football and swimming later). That's 10 years to get the kid into position for the big offer. The table shows that if the offer is a low partial a = 0.25, with low chances of p = 0.25, then no more than $2,441/10 = $244 per year (in today's dollars) should ever have been spent in the pursuit of the offer. Anybody with a youth athlete knows they spend far more than that on memberships, fees, tournament fees, equipment, “fundraisers”, travel, and the value of time.  We used to easily drop that much on a weekend swim meet.

Of course, at the other end of the spectrum, the prospects for a sure thing full ride student were worth spending of up to $76,325/10 = $7,633 per year. And it's a good thing NEV goes up since, in order to generate that higher p, spending will surely have gone up anyway! Of course the payoff at higher tuition colleges (G >$25,000) increases the rational spending for any a and p.

But on the other hand, and these would be the parents I’m talking to most, an even lower probability is strikingly revealing, regardless of the size of a or G. This second table was taken from NCAA.org on their research showing historical average chances of advancing to different levels of play (Pros are included just to drive the point home):

Level	WBB	MBB	Baseball	MHockey	FB	MSoccer
HS-NCAA	3.3%	3%	6.1%	11%	5.7%	5.5%
NCAA-Pro	0.02%	0.03%	0.45%	0.32%	0.08%	0.07%

This is just the NCAA calculating the total slots available at the next level relative to the number of participants at the lower level.  But it shows that the idea that p = .25, the lowest value in the previous analysis, is probably way too high for nearly everybody!  For nearly everybody who doesn’t have an elite athlete identified at an early age, the chances are more like the ones in the table.

At p = 0.05 (a 5% chance), like for football or men’s soccer, we can use the calculations in the NPV/NEV Table to adjust the value of spending on a developing youth athlete since everything is linear in p (5% is 1/5 of 25%).  For a = 0.25, we can just multiply the $244 per year by 0.2 and see that student now should only draw spending of $49 per year.  Even investment in a full G (a = 1.0) falls to $1,527 per year, which seems a hefty enough amount, but a few sessions of individualized coaching would eat that up pretty quick.

Realistically, if your kid is low p, the financial component cannot be about “getting that ‘scholarship’”.  Indeed, hitting the “jackpot” lessens the blow but does not cancel it.  So for the typical "pretty good" youth athlete, that is, one with low p, these meager NEV results raise the question, "What really goes on with parents and youth sports?"

We can't forget some kids are innately better than others (you can’t teach speed or size) so that some have lower investment for large outcomes than others. Also, long shots pay off occasionally but remember the real problem is whether your kid really is even a long shot. And the calculations are pretty hard and fast on what these dreams cost. If it is far-fetched in monetary return, either the investment is irrational or there is a broader explanation.

Surely it's the latter and early on I promised to return to all those other “values”.  The alternative explanations I've seen include the not so seemly—peer pressure, permissive (generous? indulgent?) parenting, or overbearing parenting. But there are also other more seemly—sports kids also keep busy and maybe out of trouble. Sports build other values. [My experiences were more along the lines of a quote I’ve seen tracked back to Grantland Rice, “Sports doesn’t build character, it reveals it.”]  And you probably heard seen some I have not seen.

But nearly all parents should stop using (hiding behind?) the money value of a "scholarship" as an explanation for their spending on their kids’ sports. What else could have been done with these resources for the vast majority of kids? If we’re talking about a relatively richer parent, maybe it's no biggie but then time spent still weighs in. If the parent is less well off, this could be a biggie for parents, depending on next best possibility. [See Roger Noll's 1998 piece, "Economic perspectives on the athlete's body," on the rationality of investment in sports by those without much in terms of other prospects. I also cover this in my Sports Economics 3d, p. 226.]

As if this weren't enough, sports economics offers another important insight on this spending. All of the other parents are out there spending the same or more than you! And your chance for success depends on what they are spending on their kid as well as what you spend on yours. [This is the logic of something called the "contest success function", a mainstay in sports economics.]

So, fun is fun and there are many types of values created (some enviable, some not so much). But spending is spending and those dollars invested at a young age are the dollars that eventually pay off the most. Here's to investing those earliest dollars wisely.