Football as financial economics

Best of the Blogs - Stumbling and Mumbling

By Chris Dillow

Watching the Chelsea v Arsenal game - or at least the first 30 minutes - made me think about the parallels between football and financial economics.

In Arsenal's case, we have an odd example in sport of tail risk. Ordinarily, teams play a bit better than normal or a bit worse but performances and results are usually roughly normally distributed. Not so for Arsenal. Ten per cent of games this season account for 50 per cent of goals conceded. And the 6.7 per cent of playing time before 1.30pm accounts for 32.4 per cent of goals shipped: as the BFG says, Arsenal don't fancy mornings.

In finance this sort of extreme negative performance is sometimes due to hitherto uncorrelated assets or strategies failing at the same time; this is how LTCM collapsed in 1998 and AIG in 2008. A similar thing happened with Arsenal. Normally, one or two players in any game will put in sub-par performances but they will be offset by others doing well. On Saturday all 11 had stinkers.

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This first appeared on Stumbling and Mumbling in March 2014

Stumbling and Mumbling

It's in this context that there's one characteristic of players that is highly prized but rarely fully acknowledged - what we might call negative betaness.

Investors value negative or zero beta assets - things that pay out well in bad times. it's the desire for these that explains: the existence of the insurance industry; the fact that deep out-of-the money put options have a positive price; and the fact that cash holdings are high even at near-zero interest rates.

Similarly in sport, a great player is someone who does well in bad times. It's unimaginable that Arsenal would have lost 6-0 with Tony Adams, because he'd have kicked them into shape.

Most of the best sides of recent years have had negative beta players - ones who didn't just play well, but played well when they needed to and got the vital goal or put in a great defensive performance when under pressure.

One thing that (for now) elevates Robin van Persie over Luis Suarez is his negative betaness. Suarez tends to do well against modest opposition but less so against big teams. But - as we saw against Olympiacos - van Persie gets goals when his team needs them. One's a high beta player, one's a low/negative beta one.

For me, one feature of a truly great player - Keane against Juventus in 1999 or Gerrard in the 2005 European Cup final - is their negative betaness, an ability to produce something when their team is desperate.

"Coaches are forever demanding consistency - in the sense of low variance of performance. What they should also look for is negative beta"

The same is true in cricket. Graeme Hick was, notoriously, a flat-track bully - a high beta player. Mike Atherton on the other hand was a negative beta player, scoring runs when they were needed.

Coaches are forever demanding consistency - in the sense of low variance of performance. What they should also look for is negative beta. Arsenal lacked such players on Saturday.

The parallels between football and financial don't end there. One feature of stock markets, famously noted (pdf) by Robert Shiller, is their tendency to excess volatility as investors over-react to good or bad times. The same, of course, is true in football. One or two good results has that great moronfest 6-0-6 full of callers telling us their team will win the league and one or two bad ones means the manager is an idiot. In the few weeks he's been in charge of S***s, Tim Sherwood has gone from being a promisingly good manager to a lousy one, and back again.

There is, I think, a point to all this. It's easy to think of financial economics as something abstruse and technical. But it's not. As I've said before, the main ideas of financial economics are applicable to other walks of life.

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