Will the best team win?
The field is set for the college football playoff. Good sportsmanship often involves wishing, “May the best team win!” But the best team does not always win, which illustrates an important element of economics.
Either LSU, Ohio State, Clemson or Oklahoma will be crowned champion on January 13. I will not prognosticate about the winner. Football fans know that many small things affect a game’s outcome. The football can take funny bounces. Passes can get deflected or dropped. A player can slip. Officials can miss a call.
How much do small, seemingly random things matter? Players can lose concentration and focus, leading to self-doubt and tentative play. Coaches can panic and make bad decisions. Small things can snowball.
Yet the games must be played to determine the best players and teams. Saying that things will be decided on the field means that experts’ judgments do not rule. LSU quarterback Joe Burrow was a 200-1 longshot to win the Heisman Trophy before the season. A stellar season on the field matters, not the prognostications.
The randomness I mean here is not necessarily a roulette wheel determining outcomes. Rather, I mean that if, say, Clemson and Ohio State could hypothetically play 10 times, each team might win five games. We could think of the outcome of their game as like flipping a coin.
Small factors also affect economic outcomes. The decisions and actions of people across the globe also influence economic actions. No one can know everything relevant for the success of a business. The many unknowable factors add to the appearance of randomness.
Contemplating a random world can be troubling. We might accept that the football could have bounced differently. But was luck as opposed to hard work and smart decisions really responsible for Amazon’s success? Has Warren Buffet just been amazingly lucky? We might want to say no, but being in the right place at the right time often matters.
The structure of sports contests suggests that bad breaks might impact business less. A dropped fourth-down pass in the final minute might decide a football game. A business has time to respond to unfortunate events like a fire at their factory. Furthermore, momentum seems more significant in sports. Bad luck in the first quarter could break a team’s spirit; a salesperson seems more capable of bouncing back from a couple fruitless calls.
Economists must learn to think of the world in terms of probabilities, especially because of the effects of relevant but dispersed information. With enough information we perhaps would have predicted Amazon’s success in 1997; a wise investor was probably thinking in probabilities.
Randomness complicates analysis and learning. For instance, the winner of a football game is not necessarily the better team. Underdogs sometimes win, and good teams can play poorly. If Ohio State vs. Clemson is like a coin flip, the teams would remain evenly matched regardless of who won a close game.
But dismissing game outcomes as coin flips runs the risk of allowing expert opinion determine the results. If Oklahoma defeats LSU, experts might still consider LSU the better team. Should LSU then play for the title despite losing?
Suppose that a new tech startup is losing money after three years, while a new concept restaurant is amazingly successful. Should the plug be pulled on the tech company and the restaurant expanded into a national chain? Economists like to say that profit and loss answers such questions, but profit also depends on luck.
The challenge is assigning importance to today’s events relative to the past. Mathematics offers a precise formula, Bayes’ Rule, for the world of math problems. We learn that we must revise our beliefs based on today’s events, although exactly how much is often unclear. Alabama finally missed the college football playoff this year; should we then dismiss them as contenders next year? I suspect not.
Fans say that football is life, but it can also illustrate economics. The best team doesn’t always win. This insight helps us to see the world probabilistically, which is indispensable for sound economic thinking.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.