What Regulators Can Learn from Professional Sports Leagues

by: Ryan Avent

Malcolm Gladwell came in for a lot of surprisingly intense criticism after his most recent story went to press. The premise — that underdogs should opt for more extreme strategies — was illustrated in part by a tale about a girls youth basketball team that beat more talented squads by ruthlessly deploying a full court press. Every basketball nut in the land, seemingly, had an issue with the piece. I don’t really get it; Gladwell’s just out there to make you think, and his broader point — that underdogs are generally far too risk averse — strikes me as absolutely true.

Anyway, the story gets mentioned some in this fun email exchange between Gladwell and ESPN’s Bill Simmons. But I particularly liked another part of the conversation, where Gladwell writes:

The consistent failure of underdogs in professional sports to even try something new suggests, to me, that there is something fundamentally wrong with the incentive structure of the leagues. I think, for example, that the idea of ranking draft picks in reverse order of finish — as much as it sounds “fair” — does untold damage to the game. You simply cannot have a system that rewards anyone, ever, for losing.

Economists worry about this all the time, when they talk about “moral hazard.” Moral hazard is the idea that if you insure someone against risk, you will make risky behavior more likely. So if you always bail out the banks when they take absurd risks and do stupid things, they are going to keep on taking absurd risks and doing stupid things. Bailouts create moral hazard.

Moral hazard is also why your health insurance has a co-pay. If your insurer paid for everything, the theory goes, it would encourage you to go to the doctor when you really don’t need to. No economist in his right mind would ever endorse the football and basketball drafts the way they are structured now. They are a moral hazard in spades. If you give me a lottery pick for being an atrocious GM, where’s my incentive not to be an atrocious GM?

I have to say that one of the most disappointing things about sports in America is that none of the major team sports leagues follows the kind of radical libertarian set-up seen in, say, continental soccer leagues. For some reason, Americans feel the need to regulate their professional leagues within an inch of their lives — strict rules on entry and relocation, no relegation or promotion, wholesale redistribution of resources, strict limits on pay and payroll. Where’s the fun in that?

Rather than spending their money on ads fighting transit investments, libertarian organizations should focus their efforts on making at least one professional league in this country like a European soccer league.