By David Butler

The transfer of Paul Pobga to Manchester United for an apparent fee of £100 million (€118 million) has been making the headlines over the last few weeks. If it goes ahead it will be another watershed for football – the first £100 million pound player.
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It has taken 37 seven years to go from the Trevor Francis £1 million move to Nottingham Forest to today’s £100 million figure (although I think technically the Francis move was worth £1.18m). I'm sure the theme of conversations in 1979 was the same as today - 'the game has gone nuts!'. By most accounts Francis didn't live up to the fee, suffering from a recurring injury during his time at Nottingham Forest.

Reading about Manchester United’s impending decision to part with the £100 million reminded me of a nice summary Richard Thaler has in his recent book Misbehaving of findings from the psychology of decision making that supports the idea that early picks in the NFL draft will be overvalued. The general ideas are more or less applicable to high end deals in football where transferred players fail to deliver relative to expectations. Here are four.

People are overconfident in their ability to distinguish between talent. To justify a £100 million fee a player should be extremely talented. Of course, objectively and accurately measuring talent, let alone potential, is very challenging. The stats do show that Pogba generally scores well, but perhaps not well enough to be worthy of the staggering fee. WhoScored.com ranks Pogba tenth in the list of player statistics behind the likes of Riyad Mahrez,  Henrikh Mkhitaryan and Angel Di Maria. The FIFA index, which adopts a 'wisdom of crowds' approach to measuring ability, has Pogba 23rd on their list. He holds the same rating as players such as Kevin De Bruyne, Sergio Busquets and Alexis Sanchez.

People make extreme forecasts. Elite players are statistical outliers. The problem is that those chasing the talent can overestimate the ability of ‘star’ performers. Scouts are perhaps too quick to define elite talent. Players like Cristiano Ronaldo and Gareth Bale are extremely rare. Is Pogba in the same bracket as these players who sold for £80m and £85m respectively not so long ago? Naive optimism can be a powerful force. 

Selective Acceptance. There is information embedded in Juventus agreeing to part company with Pogba for this fee. The act of acceptance should provide Manchester United some insights. Naturally, the Old Lady think that Pogba is worth £100m or less. A literature in economics now exists to show that people can overbid in two-party trades, suffering from the winner's curse. A quick glance at the increasingly accurate Transfermarkt.com, suggests that Manchester United would be overpaying by approximately £30m. 

People tend to believe that others think just like them. This is usually labelled the false consensus effect. In a simple sense, when a club nail their colours to the mast and publicly identify their target, it may be the case they think all other clubs share their views. Fearful of competitors, they may be more likely to give into a selling clubs demands. Although betting on the Pogba-Manchester United move is now closed, the threat of Real Madrid entering the race for Pogba's signature (whether realistic or not) may have inflated the fee.   

By David Butler,

Last week a photo broke online that showed Jürgen Klopp’s office shelf. In addition to golden gnomes, a squad photo, a dictionary and a beer, Klopp has a copy of Daniel Kahneman’s ‘Thinking, Fast and Slow’. Beside this appears to be a copy of ‘Risk Savvy: How to Make Good Decisions’ by Gerd Gigerenzer. Klopp’s choices are interesting. Economics/Psychology books take pride of place over perhaps more traditional Strategy, Leadership and Management books.

One key cognitive bias Kahneman outlines in his book is the planning fallacy. This is our propensity to overestimate the benefits of a project and underestimate its costs. This bias can lead to us naively taking on risky projects. I wonder did Klopp read Thinking, Fast and Slow’ before or after joining Liverpool?

By David Butler

The winner's curse is the tendency for individuals to overbid in common value auctions when information between buyers and sellers is not complete. If you are bidding in an auction with many others for an asset that you don’t know the value of, a winning bid can be overly optimistic and it can exceed the intrinsic value of the asset purchased. Simply put, if you win an auction when you don't really know what something is worth, there’s a chance you’ll be had! This curse has been shown to even affect experienced bidders.

This curse was originally conceptualized in light of auctions for oil reserves in the Mexican Gulf and famous experiments by William Samuelson and Max Bazerman during the 1980’s showed how buyers in the lab consistently fail to appreciate their information disadvantage when formulating a bid in bargaining games. When the best strategy to take is to opt out, the temptation to bid is too much for some. 

Economists have since looked to sport as a means to test for the winner's curse in the field. The big advantage of sport is that it provides scope for productivity evaluations that other auctions do not. We can tell how well an asset has performed after they are purchased, in this case a sports star.  

In particular, economists have looked toward baseball. The original study on the topic was by James Cassing and Richard Douglas. In 1980 the researchers analysed the bidding strategies of potential buyers of free agents in Major League Baseball, as naturally each franchise would place a different value on what a free agent is worth. The researchers found that from 1975 to 1980 free agents were overpaid relative to their productivity. A second study that cited the winner's curse was written in 1993 by Lawrence Kahn. While his research did not specifically set out to address the curse, Kahn ended up explaining his results in light of it. His study looked at salary and contract length for virtually all Major League Baseball players from 1987 to 1990. The winner's curse or 'super competitive' bidding was found again.  The most recent study comes from 2008 by John Burger and Stephen Walters who revise downward the strength of Cassing and Douglas’ (1980) original findings. Using superior measures of productivity to gauge player performance, they argue that there was positive returns to free agency over the late 1970’s and also the 1990’s. They suggest a ‘weak-form’ version of the winner's curse exists as the full expectations of buyers may still not be met.  

More information is often suggested as a solution to this curse but given that status and buying superstars for commercial purposes seems to be important across sports, it may always be the case that owners are not particularly concerned about efficiency or rational bids. Bounded rationality with a boosted ego may do just fine!