What economists can learn from sportsmen9 min read . Updated: 31 Oct 2014, 09:49 AM IST
Some central bankers have very effectively used sporting metaphors to explain what their job entails
Some central bankers have very effectively used sporting metaphors to explain what their job entails
The staid world of central banking is a far cry from the excitement of the sports field. However, some central bankers have very effectively used sporting metaphors to explain what their job entails. This is just one of the ways in which sports can tell us something about economics.
Bank of England chief economist Andrew Haldane recently used a neat cricketing analogy (mintne.ws/1vk0XQa) to explain the complexities of central banking. He said that interest rate decisions are akin to batting in the famous corridor of uncertainty, when it is not clear whether the batsman should go on the front foot or the back foot. This is the sort of disciplined bowling that the Australian fast bowler Glenn McGrath had mastered.
Batsmen are in a dilemma. Playing forward allows a batsman to reach the ball before it swings but there is a risk of misreading the movement. Playing back allows the batsman to watch the ball till the very last moment but there is a risk of being forced into a hurried shot. A central banker faces a similar predicament when it comes to economic data: should he react early or wait till the last minute? Both strategies come with inbuilt risks.
Much of central banking practice depends on such subjective decisions such as these. Former Bank of England governor Mervyn King once proposed the Maradona theory of interest rates (mintne.ws/1p5UdsD). He was especially referring to the second goal scored by the Argentine legend Diego Maradona against England in the 1986 football World Cup quarter-final. Maradona ran alone with the ball from 60m inside his half till the English goal, beating five defenders on the way. King pointed out that the extraordinary element in this goal was that Maradona ran in a straight line while the defenders expected him to swing to the right or the left. He confounded their expectations. That is often what central bankers do to take the markets by surprise.
The rational expectations revolution in monetary theory after the 1970s, which is now under attack, was based on the assumption that discretionary fiddling with interest rates has a minimal effect on real economic activity, because rational economic agents learn to anticipate the effects of central bank policy. The classic statement on this is the 1976 paper by Thomas Sargent and Neil Wallace (mintne.ws/1wIVF54).
Stimulus policies do not work in the long run. A surprise move is another matter: it has real effects precisely because it is unexpected by consumers and companies. Maradona could teach contemporary central bankers a thing or two on how to run in a straight line when others are expecting you to swerve one way or the other.
Expectations are central to modern monetary economics. Charles Plosser, head of the Federal Reserve Bank of Philadelphia, used an example from ice hockey to explain how central bankers go about their job (mintne.ws/1tSUtMH).
“Hockey great Wayne Gretzky was once asked about his success on the ice. He responded by saying, “I skate to where the puck is going to be, not to where it has been." He didn’t chase the puck. Instead, Gretzky wanted his hockey stick to be where the puck would be going next. He scored many goals with that strategy, and I believe monetary policymakers can better achieve their goals, too, if they follow the Gretzky strategy. Good monetary policymakers, like good hockey players, must be forward-looking in their actions. Setting policy that is appropriate for where the economy is today, or has recently been, is not likely to deliver the kind of economic outcomes we desire. Anticipating where the economy is headed is important because monetary policy actions affect the economy with long and variable lags. The major impact of policy often comes only after several quarters, or sometimes several years."
However, sporting analogies are not useful only to illustrate the art of central banking. The structure of sporting rules can help us understand how people behave in response to different sets of incentives, something that both game theorists and institutional economists have concerned themselves with. Douglass C. North has famously defined institutions as the rules of the game. One lucid examination can be found in his wonderful 1993 Nobel lecture (mintne.ws/1zN0FZZ). “Institutions are the humanly devised constraints that structure human interaction." North says that these can be formal constraints such as rules or constitutions or informal constraints such as social norms or conventions. “Together they define the incentive structure of societies and specifically economies," says North.
Players react to the rules of the game: that is what both economists and sportsmen know. One of the most delightful analyses I have read about how the rules of a sport matter comes from John Rawls, arguably the greatest political philosopher of the 20th century. In a letter published in Boston Review in March 2008 (mintne.ws/1rVtlHp), Rawls recounted a conversation he had many years ago with the legal scholar Harry Kalven, Rawls’s colleague at the University of Chicago. The most important part of the letter is worth reproducing here in full.
“First: the rules of the game are in equilibrium: that is, from the start, the diamond was made just the right size, the pitcher’s mound just the right distance from home plate, etc., and this makes possible the marvelous plays, such as the double play. The physical layout of the game is perfectly adjusted to the human skills it is meant to display and to call into graceful exercise. Whereas, basketball, e.g., is constantly (or was then) adjusting its rules to get them in balance.
Second: the game does not give unusual preference or advantage to special physical types, e.g., to tall men as in basketball. All sorts of abilities can find a place somewhere, the tall and the short etc. can enjoy the game together in different positions.
Third: the game uses all parts of the body: the arms to throw, the legs to run, and to swing the bat, etc.; per contra soccer where you can’t touch the ball. It calls upon speed, accuracy of throw, gifts of sight for batting, shrewdness for pitchers and catchers, etc. And there are all kinds of strategies.
Fourth: all plays of the game are open to view: the spectators and the players can see what is going on. Per contra football where it is hard to know what is happening in the battlefront along the line. Even the umpires can’t see it all, so there is lots of cheating etc. And in basketball, it is hard to know when to call a foul. There are close calls in baseball too, but the umps do very well on the whole, and these close calls arise from the marvelous timing built into the game and not from trying to police cheaters etc.
Fifth: baseball is the only game where scoring is not done with the ball, and this has the remarkable effect of concentrating the excitement of plays at different points of the field at the same time. Will the runner cross the plate before the fielder gets to the ball and throws it to home plate, and so on.
Finally, there is the factor of time, the use of which is a central part of any game. Baseball shares with tennis the idea that time never runs out, as it does in basketball and football and soccer. This means that there is always time for the losing side to make a comeback. The last of the ninth inning becomes one of the most potentially exciting parts of the game. And while the same sometimes happens in tennis also, it seems to happen less often. Cricket, much like baseball (and indeed I must correct my remark above that baseball is the only game where scoring is not done with the ball), does not have a time limit."
Human behaviour sometimes depends on the structure of rules. In a paper published in the American Economic Review in 2002, Mark Duggan and Steven D. Levitt showed how the rules in Japanese sumo wrestling provided incentives for corruption. Their research showed that those who have already qualified for the next level tend to lose far more bouts than the records suggest. Wrestlers who had seven wins in a season had an unusually high winning percentage against wrestlers who had eight wins. The two economists said that sumo wrestlers with eight wins collude with those who have seven wins because they have nothing to lose. They are quite prepared to throw a match for money. The results of this paper got international fame in Freakonomics, the bestseller that Levitt later co-wrote with journalist Stephen J. Dubner.
Another fascinating example on why rules matter comes from US college basketball—more specifically why rules need to be changed if the behaviour of players has to change. College basketball was losing audiences in the early 1980s because teams were too defensive. The administrators in the US National Collegiate Athletic Association decided to introduce a rule suggested by one Danny Biasone, who saved the National Basketball Association from a similar crisis in the 1950s.
Biasone invented the shot clock. “Like many revolutionary ideas, his was simple. He divided the 2,880 seconds in a 48-minute game by the average number of shots per game, or 120. He arrived at an average on one-shot taken every 24 seconds. By the new rule, if the team on offense failed to shoot the ball within 24 seconds of taking possession, the whistle would blow, and the other team would get the ball… The idea rescued pro basketball and ushered in the new era," write economists Wayne A. Leighton and Edward J. Lopez in their book, Madmen, Intellectuals and Academic Scribblers: The Economic Engine of Political Change.
You need to change the rules of the game in a structural crisis. It is something that economic reformers have known very well.
Something similar to basketball happened in cricket, with one-day cricket emerging in the 1960s in response to endless pad play in five-day games. The change in rules changed cricket forever. Of course, behaviour does not change in response to new rules alone. Some players transform the game within the existing rules. I can think of no better example than what Sachin Tendulkar and Sanath Jayasuriya did in the 1990s. The standard strategy in 50-over games was to play safe in the first 10 overs, so that wickets were in store for the final assault. These two brilliant cricketers turned this wisdom on its head when they began to open the batting for their respective teams. The main assault has been in the first 15 overs ever since.
Think of it as a brilliant entrepreneurial insight, revealing new possibilities even within the existing rules of the game.
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