Sunday, March 22, 2009

Empirical Behavioral Economics in Sports Illustrated

In my humble opinion, the dudes of economics write too many sports papers. Would women journal editors accept these? But, this week's Sports Illustrated reports evidence that will thrill behavioral economists and annoy Milton Friedman and his other bald intellectual grandchildren.

This Sports Illustrated article focuses on pro athletes who were paid millions of dollars but are now bankrupt. The article hints that these guys do not abide by the permanent income hypothesis. They over-consume out of current income. They trust too many friends and partners with their money and they hang out with too many young ladies who want a share of their winnings. Ex-Post , the athletes have regrets and wish that they had met with a financial planner at the start of their career and given up some of their financial freedom in return for a smoother consumption stream.

One story here is that the typical pro athlete doesn't have much education and low-education guys are on average more likely to act "behavioral". Randomly assigned talent and a large amount of $, they are impatient and front load their pleasure. Once the party is over and their capital stock is now zero, they wish they could hit the reset button. Perhaps, they have followed their dynamic utility maximizing path given their rate of patience?