Marginal Revolution: Markets in everything

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« Deflation | Main | The Myth of the Rational Voter, by Bryan Caplan »

Markets in everything

Wall Street is about to launch a new way to trade professional athletes the way you trade stocks. A piece of Tiger, anyone?

Here is further information.

Posted by Tyler Cowen on April 18, 2007 at 02:57 PM in Sports | Permalink

Comments

I wish I had purchased some Roger Federer in 2002. Damn.

Posted by: steveintheknow at Apr 18, 2007 3:07:35 PM

There's a lot of anecdotal evidence that an athlete's performance tends to degrade after he has landed a big money contract, presumably because he has less incentive to perform at that point. I have no idea if any real work has been done to substantiate or discredit this hypothesis, but if it is true, then it could cause a problem for this market.

A big up-front payment for a share of future earnings could correlate to a drop in performance. This would reduce the value of other athletes' IPOs, causing fewer of them to do it. You might end up with the lemon market problem: athletes willing to accept the reduced IPO prices may tend to be the ones who are less motivated to perform, which would further push down prices, and so forth.

What's an athlete's motivation to do this in the first place? A form of injury insurance?

Posted by: Kevin M at Apr 18, 2007 3:17:44 PM

I've been using ProTrade for a couple months now. Star players tend to be horribly over inflated especially in baseball right now since players haven't "earned" much yet. Much of this likely has to do with the fact that there isn't any real money involved. A market in athletes seems to be just another form of gambling on sports.

The anecdotal evidence that athletes perform worse after landing a new contract and perform better in a contract year, is just that...anecdotal. Baseball Prospectus has done quite a bit of work into the myth that players perform better in a contract year.

Posted by: Dave K at Apr 18, 2007 4:37:56 PM

There still seems to be at least some potential for information asymmetry to cause problems, for similar reasons as Akerlof describes in his lemon market paper. Athletes, taken in aggregate, may have better knowledge of their own future performance than investors. So if they act rationally, the only ones who will sell shares of their future income will be the ones for whom the market is over-estimating their value. The market can adjust prices downward to compensate, but it won't help, because the problem still remains. Eventually it collapses.

Even if you propose that players don't act rationally due to inflated egos, the market could still fail. If players are positively biased on their own abilities, they are unlikely to be able to successfully sell shares, because they would be over-priced.

Posted by: Kevin M at Apr 18, 2007 8:50:11 PM

Kevin:

I think you've gotten something confused (not that it's that hard - the initial link seems a little jumbled) - that mention of athlete's future income being involved is for an earlier patent, not for Protrade. I don't think the players are giving up any of their future income or are in any way associated with it other than that their names are being used and there are some prizes (autographed footballs and such). Basically this looks like a fantasy league with multiple shares of athletes rather than a single share of the athlete and with actual prices to trade the shares rather than having to rely on the whole double coincidence of wants thing to trade "shares" (players).

Posted by: AZ at Apr 18, 2007 10:50:59 PM

Even if there is no incentive effect, you would expect players who receive high-profile contracts to regress to the mean, simply because part of their prior performance was luck.

Posted by: Douglas Knight at Apr 19, 2007 12:49:03 AM

The Michael Lewis piece is a complete mess. The editing in that article couldn't have involved much more than an automated spell-check.

ProTrade has been around for a little while now. It's not clear to me how "Wall Street" was or will be involved in "launching" the site.

Posted by: Trieu Truong at Apr 19, 2007 2:31:23 AM

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