I was halfway through a draft post on some recent books when I read Brian Goff’s recent entry ‘LeBron “Stumbling on Losses”‘. Brian has highlighted some of the interesting arguments in the new work by David Berri & Martin Schmidt, “Stumbling on Wins” (2010, FT Press). For the lay reader, ‘Stumbling on Wins’ is a very good introduction to the myriad of ways that people make sub-optimal, or irrational decisions on the sporting field and when recruiting, drafting or paying players and coaches.
Brian mentioned the tensions often found within the discipline of economics between behavioural and neoclassical approaches to economics, and this leads nicely into another superb book I recommend, by economics & finance journalist Justin Fox: “The Myth of the Rational Market” (2009, Harper Business). Fox has produced a highly readable account of the tensions within Wall Street offices, academic finance departments, and the economics profession at large between the simplifying assumption of the efficient market hypothesis and the reality that stock market noise cannot be simply described as a series of random walks, because people do, in fact, act irrationally in ways that produce non-random patterns in supply, demand and prices.
When you put these works together, I can’t help but wonder when the most prominent efficient markets hypothesis equivalent in sports economics – the zero transaction cost version of Rottenberg’s invariance proposition / Coase’s theorem will be torn down by scholars, journal/book editors and reviewers. Many have nibbled around the edges over the past 20 or more years, yet still the zero transaction cost assumption lives on all too often.
Sports economists are increasingly challenging the simplifying assumptions in the models of this discipline’s originating scholars; yet many prominent books and articles published this century highlight how far we have to go. Berri & Schmidt (2010) provide some good accounts for the layperson of how economists are identifying the effects of irrational behaviour in sport. But the edifice of the zero transaction costs assumption still retains prominence in both models of sporting leagues and labour markets, and the accepted leading commentaries on those models; for one, the excellent “Handbook on the Economics of Sport” (2007, Edward Elgar), can’t even find enough to justify an index entry for ‘transaction costs’. Surely that is irrational.