Saturday, October 29, 2011

Moneyball in the NBA

Chicago Booth economist Kevin Murphy is a certified MacArthur Foundation "genius grant" awardee and has a well-earned reputation as one of (if not the) smartest economists around.  Murphy is advising the NBA players association in their collective bargaining negotiations with the NBA owners.  Great interview with Murphy in this post on, where he makes the following points:
  1. I don't think it pays to try to pull the wool over the other side's eyes. When it comes to economic analysis, I try to be as honest as I can with the people on the other side.It doesn't do you any good to try to fool 'em. They're not dumb. You're not going to succeed and then they're not going to trust you.
  2. The difference between being an NBA Finals team and being an also-ran is a couple of guys -- maybe one guy. It's only five guys and you can give the same guy the ball every time you come down if you want to.  
  3. In a statistical sense, the level of payroll of a team explains somewhere like 5 percent to 10 percent in the variation in outcomes.
  4. I would say the primary disagreement is not over the accounting numbers. It's what you include and how you interpret the numbers. For example, the accounting picture of the NBA isn't very different from what it was five years ago or 10 years ago in terms of ratio of revenues to costs and all the rest -- it's changed very little. Which immediately tells you, wait a minute, if the underlying financial picture is similar today to what it was five years ago or 10 years ago, and people are paying $400 million or whatever for franchises, and you're telling me that these things lose money every year, something's missing, right? These people aren't stupid, right? These guys are worth billions of dollars. So why did they pay all this money for franchises that, it looks like, lose money? Well, the answer is pretty clear. There are a couple of things that are really attractive. One is, historically, you've seen franchises appreciate in value and that appreciation has more than outstripped any cash-flow losses that you've had. And if you're in the right tax position, it's actually pretty good because you've got a tax loss annually on your operating and you've got a capital gain at the end that you accumulate untaxed until you sell it and then pay at a lower rate. So you get a deferred tax treatment on the gains and an immediate tax treatment on the losses, that's not a bad deal.
  5. Ultimately what it comes down to is, you get what you can negotiate. It's not what you deserve, what's "right," that ends up carrying the day. But then they ought to be straight up. They ought to say, "We've got the ability to negotiate. We'll hold your feet to the fire and get what we can."The one thing I don't want to see happen: I don't want to see any lingering bad blood between the two sides. That's not good either. You run the risk that, if it gets too personal, that creates its own set of frictions going forward. I think people on both sides are cognizant of that.


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