Thursday, July 25, 2013

Extraordinary Popular Delusions and the Madness of Even Small Crowds

Transfer season is upon European football again, and with it come the delusions and madness. 

Arsenal supporters have been infected, with some actually contacting the club via social media to demand the immediate deployment of the large cash stake on new players; the new Manchester United manager David Moyes has experienced the epidemic of crazy as well, having thus far failed to sign any of his high profile transfer targets; the denizens of the blue side of Liverpool have been flummoxed that Everton's new manager Roberto Martinez sees players from his former and relegated team Wigan as his main solution to improve the Toffees.

Although distinctive dynamics are at work in each club, all have more to spend thanks to the explosion of television rights money, which is increasing from £3.5 billion in 2012-13 to more than £5 billion in 2013-14. Meanwhile, Financial Fair Play (FFP), whatever impact that may have, will not come into full effect until at least mid-2014, so some clubs may be taking a last run at profligacy. Then there's the peculiarity of the system of player exchange in Europe and the illusion that this system creates a "market" for players, especially at the highest levels.

The infernal design

Bizarre individual and group behavior is almost unavoidable given the twisted nature of the transfer window, the structure through which clubs exchange player services. Viewed among other systems of moving professional athletes, the transfer window has three distinguishing characteristics:
  1. It limits activity to only three months (January and July-August)
  2. It overlaps with the most crucial period of the season
  3. It is dominated by cash deals
The brevity of the open transfer window not only produces a mad rush of activity, it means that club managers and executives have little opportunity to improve their charges' fortunes based on observed evidence. If they see a shortage or a surplus in a particular area, they can only address that in January or between seasons. That leads to questionable decision-making. (See Samba, Christopher, and Redknapp, Harry.)

Improving a side through transfers is more difficult because the primary period of player movement occurs during the pre-season and the first few weeks of the season. This schedule can keep a team from developing a full collective understanding, which is a vital quality given the flow of a football match and the relative self-regulation of  its participants. The degree of player autonomy in manager Arsène Wenger's philosophy and flurries of transfer activity in the important weeks of August have at least partly caused Arsenal's early struggles in the past two seasons.

This summer's transfer period will again see big money move among the European football clubs, unlike transactions in U.S. sports. In Major League Baseball and the NBA, for example, cash is often a secondary component of a deal; it's the exchange of players themselves that drive most transactions. Some parties in those deals are even motivated by "anti-cash," or the savings enjoyed from unloading a large contract and the flexibility that brings under league-wide spending caps.

Cash, the dominant currency of football transactions, gives the appearance of free exchange: One club doesn't need to employ a player sought by the other party to do a deal, it just needs enough money to persuade the other to sell.

A market for crazy

But the freedom, flexibility, and comparability cash theoretically provides do not make player exchanges informed or their pricing transparent. I'd suggest that these transactions don't add up to a market at all. They're instead a number of discrete exchanges giving off the illusion of market characteristics because cash is enabling the transfer of similar services for a price.

Close observers of the Arsenal, particularly Elliott of @YankeeGunner, have argued that the issue of a player's "worth" is beside the point. If Arsenal wants a player, CEO Ivan Gazidis, chief negotiator Dick Law, and Wenger have to be willing to pay what the other club demands. I'd take this logic a step further. Because there are so few transactions among top clubs for world-class talent, I'd say that each transaction bears almost no relationship to any other.

Here are the summer 2013 transfers to date between Champions League clubs for world-class talent, defined as members of national teams (figures from transfermarkt):

  • Edinson Cavani, striker, from Napoli to Paris-Saint Germain for €64.5 million
  • Mario Götze, attacking midfielder, from Borussia Dortmund to Bayern Munich for €37 million
  • Henrikh Mkhitaryan, attacking midfielder, from Shakhtar Donetsk to Borussia Dortmund for €27.5 million 
  • Mario Gomez, striker, from Bayern Munich to Fiorentina for €15.5 million 
  • Carlos Tevez, forward, from Manchester City to Juventus for €9 million
  • David Villa, striker, from Barcelona to Atlético Madrid for €2.1 million
That's it. Only six national team players have moved from one Champions League club to another during the current transfer period.

What if we expand the borders and look at national team players from top-four clubs outside the European leagues? None qualifies.

My point is that this handful of transactions doesn't serve as much of a market. There just aren't enough comparables to determine what prices should be, and each exchange seems distinct from the ones before and after it.

The only exception I would make is for moves in which one club is participating in another transaction. Even then, thanks to their resources, Bayern Munich, Barcelona, Real Madrid, Chelsea, Manchester City, and PSG can conduct multiple, megamillion-euro or -pound acquisitions without concern for offsetting the costs.

Add the intensification of player power, and you have a hugely distorted "market." Players tempted by moves elsewhere, regardless of their contractual status, can threaten to go on strike, leaving their current employers with little recourse but to sell. That changes the supply-demand dynamics and the prices of transactions, which makes connections from one deal to the next even more tenuous.

If it's hard to discern a clear relationship among exchanges during one transfer window, connections from one period's transactions to what went on in previous periods are positively opaque. For that reason, any meaningful conclusions about trends--"prices are going up" doesn't count--are suspect, and models based on those trends seem flawed. 


For at least 10 years, Arsenal as a club resisted the excesses of the transfer system. I wrote in January that risk aversion seemed to be the guiding principle of the club's transfer dealings. This approach took the club away from acquiring world-class players from other Champions League sides, so it did not act as a buyer in those rare transactions. The sensible image of the club and its decision-makers therefore persisted, though I argued that their risk calculus was suspect.

Now that money is less of an issue for the club, it's seeking top talent from top competitors. The question is, are Gazidis, Law, Wenger, and their colleagues prepared to act in this different environment? They have been reasonable to apply economic principles to the host of transactions in the €20 million and less range, where the set is large enough to render the cash comparisons among player assets meaningful. Can they bend those principles to succeed in a different setting, one in which it's unreliable to compare asset values and unreasonable to expect selling those assets for a higher price later?

We'll have our first indication by September 2.

* - title an homage to Charles Mackay's seminal work

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