Wednesday, July 12, 2006

Revenge of the Uglies

So you thought Australia was robbed? There isn't a World Cup fanatic I know who hasn't complained about the decisions of the referee these past three weeks. It's my sad duty to let you know that you are probably right to complain.

Thomas Dohmen, of the University of Bonn, has just published a study of the behaviour of German referees in 3500 matches in the 12 years to 2004. He finds that statistically they are biased in favour of whatever team happens to be playing at home. They lengthen those games in which the home team is behind and they award it more disputed and incorrect penalties than they do its opponents.

But not for the reason you might think.

What is important, Thomas finds, is not the referee's own affiliation, but unrelated factors such as the composition of the crowd, the stadium's design and the spectators' proximity to the field. Of particular importance is whether or not the match takes place in a stadium with a running track.

With a running track spectators are kept at bay and the referee is more likely to make correct decisions. Without one, referees seem to succumb to crowd pressure. As he puts it: "Referees are 10 per cent less likely to decide correctly when the game takes place in a stadium without a track."

Dohmen is not the first economist to discover that although referees are paid to be objective, their decisions are affected by the mood of the crowd around them...

In 2002 British researchers played to professional referees videotapes of an English Premier League game and asked them to decide whether or not to award a foul. One group watched the tape in silence. The other heard the crowd noise. The group that was able to hear the crowd awarded 15 per cent fewer fouls against the home side.

These economists aren't studying football for its own sake. They are examining it because it is one of the best ways of working out how we make decisions in the rest of our lives.

Do supervisors in our workplaces bend their assessments of their employees in the face of social pressure from the people around them? It is very hard to tell. But for football, where there is plenty of data, it is easy.

And as many of us who've just watched the penalty shoot-outs in the World Cup can attest, it can also tell us about our preparedness to take risks.

The economist Steven Levitt and colleagues from Stanford University and the University of Chicago have examined the direction in which players kick when they are offered a penalty.

They find that they kick the ball straight down the middle much less often than they should if their aim was to maximise the chance of getting a goal. Why choose the more risky route or kicking to the right or the left rather than going straight down the middle?

As Levitt puts it: "If you kick it right down the middle and you don't score, it is damn embarrassing. So even though the middle is a great play statistically, kickers don't choose it very often. There are some things that are even more important than winning, like not looking like a fool."

It is an extraordinary finding, because in professional sport decisions are meant to be about results, not feelings. The players are paid incredibly well, their every move is documented and an awful lot depends on the outcome. And yet they are prepared to compromise it in order to avoid being embarrassed.

It is common in US baseball as well. Three years ago Michael Lewis published Moneyball, described in some reviews as the best book about sport ever written. In it he documents the rise of the California's Oakland As, one of the poorest teams in the league. Instead of choosing its players on the basis of gut feel (where the decisions of its scouts might succumb to social or peer pressure) it used a laptop and cold hard stats.

The players it chose were more likely to take risks that might make them look foolish. Because of that they did better.

But they looked appalling. Most looked nothing like the jocks chosen by the teams with big money. They were lanky, fat, old or slow. And cheap, with few inhibitions.

It was a strategy that enabled the Oakland As, the league's second-poorest team, to win more regular season games than any other, with the exception of the Atlanta Braves.

Moneyball only appears to be a book about sport. It is actually a book about business. At one point Lewis asks: if professional sporting managers get so much so spectacularly and expensively wrong in a field in which there are clearly defined rules and massive documentation, what does that say about other fields, such as fund management, in which there are few rules and almost no documentation of minute-by-minute decisions?

Might the lowly paid administrators of non-profit industry funds do better than the big boys running the professional for-profit funds whose reputations are at stake? Might what applies to the business of sport apply to business more generally? The bigger your reputation, and the more you know you are being watched, the worse will be your decisions.

In those circumstances, might the best way to make decisions be as an ugly misfit, as were the players for the Oakland As. Or might it be to "turn down the sound" as did the referees in Britain?

Or, in the words of the country music ballad, to "dance like there's nobody watching, sing like there's nobody listening, and love like you'll never be hurt".


Wednesday, July 05, 2006

Canberra's self inflicted budget woes

There’s something about the ACT’s funding crisis that doesn’t add up. In last month’s Budget, the Territory’s Chief Minister and Treasurer, Jon Stanhope, announced plans to close around one quarter of the Territory’s schools. He is to pull the pin on 22 preschools, 15 primary schools, 1 high school and 1 college.

And he is to do it at a time when the wealth of Australians, and ACT citizens, has never been higher. Australia is enjoying its 15th straight year of economic growth. The ACT’s unemployment rate is Australia’s lowest.

If Australia was in a recession it would be easy to understand belt-tightening.

But at a time of record prosperity?

Jon Stanhope says it’s a question of Government income. While the citizens of the ACT are indeed spending more than ever before, that money hasn’t been trickling through to their Government. In his words, the ACT has the ‘narrowest revenue stream’ of any State or Territory.

But why would that be? It was meant to have the most lucrative.

When Canberra was built on land acquired from farmers in 1913, the land was to remain government-owned. The Constitution requires that the national capital be on land ‘vested and belonging to’ the Commonwealth. Speaking in the House of Representatives in 1903, founding father Sir Edmund Barton made his intention absolutely clear: ‘Within the area that is chosen, the Commonwealth should be the landlord or the proprietor of every square inch of private land.’

Rather than selling blocks of land, the Commonwealth sold leases permitting the use of that land for specified periods of time. Householders were sold 99-year leases and businesses were usually sold shorter leases, many of them for 50 years...

Continuing to own the land on which Canberra’s businesses and houses sit has been enormously useful to the Commonwealth, and later to its successor, the ACT Government. It has enabled them to enforce very strict planning controls (‘build it our way, or you will be in breach of the lease’) and made it simple to collect rates (‘if you don’t pay, we will kick you off’).

It has also provided the ACT administration with a guaranteed future revenue stream, as intended by the drafters of the Constitution.

That revenue was never likely to come from householders. The residential lease term of 99 years was very long, and electoral pressure would likely prevent the charging of a new fee to extend leases when they expired. All of the Territory’s residential leases have since been extended to 999 years (complying with the letter, but certainly not the spirit, of Edmund Barton’s wishes).

But business leases were set up to be a source of continuing revenue. After the first 50 or so years of Canberra’s life, business leases were set to come up for renewal virtually every year. Because the leases were sold and valued in the knowledge that they expired after a period of time, businesses planned in the knowledge that they would have to shell out fresh money to buy new leases when they expired.

But it was easier and far more lucrative for businesses to lobby both sides of the relatively young ACT House of Assembly. Just before Christmas in 1996, both the Liberal and Labor Parties in the House of Assembly voted to convert all commercial leases from 50 years to 99 years, without charge.

It represented a windfall for the holders of existing commercial leases. Estimates put the value of the change at between $115 million and $1.2 billion.

Australian National University economist Julie Smith predicted that ‘present and future ACT citizens [will] pick up the tab … with either a 13 per cent addition to residential rates, or further cuts to health, education and community services.’

Smith specialises in urban economics and the economics of public health. As it happens, she is a pretty good economic forecaster.

At the time, members of the ‘Liberal and Labor branches of the ACT Property Party’ as Smith called them, poured scorn on her claims. But she was right. The baby government of the ACT (self-government was less than a decade old) had sold out its economic future.

Jon Stanhope wasn’t in the ACT Government at the time. It was his predecessors who ensured that he has, as he now puts it, the ‘narrowest revenue stream’ in the country.

As an ACT resident explained at the time, giving evidence to a Commonwealth Parliamentary Committee: ‘it was as if they said to single mothers living in public housing “okay, we will give you the house now, you can stop paying rent”’.

The ACT has been the author of its own decline.