Author: SK

The Problem With American Sport

There was a basketball epidemic when I was in high school. It was probably a result of two things – we used to play basketball regularly in school, and Star Sports (or was it still Prime Sports?) had started showing live games from the NBA. Everyone in school would talk about basketball. Your knowledge of basketball went beyond the Magic Johnsons and Michael Jordans. You learnt about teams with wonderful names such as “Utah Jazz”. And for reasons completely unknown to me, despite having never watched him play (I still haven’t) Patrick Ewing became my favourite player.

So one morning I decided to see what the fuss about NBA was all about, and watch a game. It made for horrible viewing. There were great plays, of course. It was a great spectator sport in that sense. But what annoyed me endlessly were the time outs and consequent advertising breaks. Just when I would get settled into the rhythm of the game, someone would call a time out and for the mid 90s, two minutes of advertising was a really long time!

I still continued to watch, for “pseud value”, so that I could talk about it in school. However, I could never get the kind of engagement that I could get with cricket (then) or football (now). The game was simply way too discontinuous. A game of basketball is supposed to last 40 minutes, but these things would last three times as long. I don’t think I watched more than 2-3 games.

As everyone on my facebook timeline talks about the Super Bowl, the only thing I can think of is how unwatchable American Sport is. I understand that you need the ads to fund the game, and that greater advertising revenue means greater revenue for players and hence greater quality of sport. What irks me however, is that these ads end up causing much discontinuity in the sport.

So this morning I was thinking about why I get irked so much about ads in American sports (basketball, american football, etc.) while I can still watch cricket, which has a fair share of ads. The answer lies in randomness. I know when a cricket telecast will switch to ads – at the end of every over, at the fall of a wicket, or in an innings break. When an advertisement comes in a cricket broadcast, I’m prepared for it (except of course, when greedy broadcasters cut to ads before the full over is bowled). It is a similar case in tennis, where I expect to switch to advertisements after every two games – there is a rhythm to it.

In American sport, it is not so. That teams can call for a timeout at any point in time, and that can completely put you off. The game cuts to advertisements at moments when you least expect it, and that can be a huge challenge for someone not used to it!

A year or so ago, I had attended this lecture on sports analytics in Bangalore, delivered by a University of Chicago professor. He said that the reason football hasn’t taken off in the US is because it is not television friendly. “Split a game into four quarters, introduce two time outs in each quarter, and you will see Major League Soccer taking off”, he said. The problem, however, is that this would simply ruin the continuity of the game – which is what a lot of people love about football. And looking at the funding of the clubs in the major European leagues, it is clear that football is making sufficient money from television in its current form, without any gimmickry.

An American colleague at my last job offered another perspective. “How can you watch a game continuously for 45 minutes”, he asked. “We are so used to breaks in play every few minutes that we can’t watch continuously for so long”. If I can extrapolate from this one data point and take it with conjunction with what the professor said, you know why football is not popular in the US.

When I woke up this morning I wanted to check if the Super Bowl was being telecast in India. Then I remembered my earlier experiences of trying to watch American football, and decided against it. It is too discrete a game for my liking. There are too many breaks in play. I’d any day watch rugby instead! It is a similar game but so much more elegant and continuous!

Gas credits and trading

So last week the government took a decision to increase the number of subsidized gas cylinders per family from nine to twelve per year. People say it is a move aimed at the elections, but it doesn’t impress me. It doesn’t impress me because it doesn’t affect me.

We are a family of two (wife and I), and have a subsidized gas connection. We cook at home daily, but since it’s just the two of us and we’re a “DINK” (double income, no kids) family, we don’t end up using all that much of gas. We use the cylinders strictly for cooking purposes only (not for heating water or running our car), and in the last three years or so when we’ve lived together we’ve averaged about three cylinders a year.

Given that we use only three cylinders a year I’m pissed off that the government has increased the subsidy from nine to twelve cylinders a year! Earlier, subsidy for six cylinders that I was getting was going waste, and now subsidy for nine cylinders is going waste! I don’t like it.

The only statistics that are out about the number of gas cylinders people use is that 90% of the population uses 9 cylinders or less a year, and 97% of the population uses 12 cylinders or less (numbers from a TV debate on the topic I watched last week). What we don’t know is the average number of cylinders consumed by a household with subsidized connection.

Given that I’m not availing of most of my subsidy, I should be allowed to trade in my subsidy for something else – subsidy on petrol maybe? If a family that belongs to the 3% that uses more than 12 cylinders a year, we should be able to strike a deal so that some of my unused subsidy can be channeled to give that family additional subsidy! This is just like carbon credit trading happens – where carbon efficient companies can sell pollution rights to companies that emit more CO2.

If you realize, what I’m getting at is that I don’t want to be “punished” (in terms of lesser subsidy) because I use less gas than the average Indian household. I want the same subsidy, too, so what if I use less gas? Perhaps the subsidy can be given in the form of an unconditional cash transfer?

While on the topic, it is absurd that LPG and all other rations are at the household level, and not individual level. We use only 3 cylinders a year because we are a family of two. Why should we get the same amount of subsidy as (let’s say) a family of twelve? Given that soon we will have universal coverage under UID, the LPG subsidy regime can be modified as follows.

Each individual (from a newborn baby to an adult) will be eligible for two subsidized LPG cylinders a year. For every LPG connection you have, multiple Aadhaar numbers will be attached – this is the list of “dependents” on that particular connection, and the total subsidy is the number of Aadhaars attached times two. Notice that the reason we have the present subsidy regime is that the Aadhaar is a necessary condition for moving to a per capita subsidy regime! Just goes to show how public services can be completely reformed once Aadhaar gets implemented.

Analytics and complexity

I recently learnt that a number of people think that the more the number of variables you use in your model, the better your model is! What has surprised me is that I’ve met a lot of people who think so, and recommendations for simple models haven’t been taken too kindly.

The conversation usually goes like this

“so what variables have you considered for your analysis of ______ ?”
“A,B,C”
“Why don’t you consider D,E,F,… X,Y,Z also? These variables matter for these reasons. You should keep all of them and build a more complete model”
“Well I considered them but they were not significant so my model didn’t pick them up”
“No but I think your model is too simplistic if it uses only three variables”

This is a conversation i’ve had with so many people that i wonder what kind of conceptions people have about analytics. Now I wonder if this is because of the difference in the way I communicate compared to other “analytics professionals”.

When you do analytics, there are two ways to communicate – to simplify and to complicate (for lack of a better word). Based on my experience, what I find is that a majority of analytics professionals and modelers prefer to complicate – they talk about complicated statistical techniques they use for solving the problem (usually with fancy names) and bulldoze the counterparty into thinking they are indeed doing something hi-funda.

The other approach, followed by (in my opinion) a smaller number of people, is to simplify. You try and explain your model in simple terms that the counterparty will understand. So if your final model contains only three explanatory variables, you tell them that only three variables are used, and you show how each of these variables (and combinations thereof) contribute to the model. You draw analogies to models the counterparty can appreciate, and use that to explain.

Now, like analytics professionals can be divided into two kinds (as above), I think consumers of analytics can also be divided into two kinds. There are those that like to understand the model, and those that simply want to get into the insights. The former are better served by the complicating type analytics professionals, and the latter by the simplifying type. The other two combinations lead to disaster.

Like a good management consultant, I represent this problem using the following two-by-two:

analytics2by2

 As a principle, I like to explain models in a simplified fashion, so that the consumer can completely understand it and use it in a way he sees appropriate. The more pragmatic among you, however, can take a guess on what type the consumer is and tweak your communication accordingly.

 

 

The Congress Party is a bubble

I think the congress party is a bubble. From what I’ve observed of the party in the last 10-15 years, they have no real ideology other than “loyalty to the Nehru-Gandhi family”. In other words, they have grown and flourished significantly without having any strong fundamentals. Which means they are in a bubble.

Let’s say you are a congressman and for whatever reason you were pissed off with Rahul Gandhi following his interview with Arnab Goswami on Monday. Now, because the uniting ideology in the party is “devotion to the family”, you cannot come out in criticism of the family or one of its members. If you do, you get hounded by other Congressmen, whose loyalty to the party is chiefly due to loyalty to the family.

Now, imagine a large number of congressmen think thus. If they had a way to communicate to each other about their displeasure with the family, they would come together and raise a no confidence motion against the party leadership. However, the problem is that no Congressman wants to let it be known in the party that he doesn’t like the family, for he can be accused of betrayal and removed from the party. Hence he keeps his thoughts to himself. That he keeps his thoughts to himself means that other congressmen who feel the same way also keep their similar thoughts to themselves, and the general discourse is that all congressmen are loyal to the family.

So why is “the family” is so powerful in the Congress? The answer is that the family is powerful because Congressmen think the family is powerful. A congressman thinks that his career in the party will be furthered if he is seen as being loyal to the family. So irrespective of his opinion, he puts up a facade of being loyal, and that increases the value of being loyal to the family!

A commodity is said to be in a bubble if its price is being driven up solely because other players in the market think that its price is going to be driven up, without the fundamentals being in favour of an increase in prices. You can think of “the family” of the Congress as one such commodity. Congressmen like to praise the family (i.e. go long the commodity) because they think everyone else in the Congress is doing the same, and thus the “price” is going to increase.  You can see the cycle of positive reinforcement that is at play here.

Like all bubbles, the Congress Party bubble is also bound to burst. And like other burst bubbles, this one is likely to end badly for the party – a split in the party cannot be ruled out in the period immediately after the bubble is burst.

The problem with bubbles, however, is that you don’t know when it will burst – anyone who can predict when a bubble can burst would be an extremely rich person. And you don’t want to be shorting a stock thinking the bubble might burst, only for the bubble to continue. And so you continue to dance, for the music is still playing.

Sangakkara and the IPL Auction

Sri Lankan cricketer Kumar Sangakkara has decided to not participate in this year’s IPL auction. In the opinion of this blog, this is an extremely smart decision, for Sri Lankan cricketers are unlikely to be available for a large part of this year’s IPL, thanks to their tour of England starting in May. Let me explain.

The IPL Auction is a strange beast. Each team has a salary cap, and players are auctioned across teams such that a team spends no more than its salary cap (in total). Now, in case a player is not available for a particular part of the tournament (due to a clash in schedules due to international commitments, essentially), the fees paid to the player is pro rated according to the number of matches for which he is available. However, while calculating the team’s salary cap, the player’s full season salary will be counted.

For example, if Sangakkara were to participate in the auction, and win a salary of Rs.5 Crore. Now, if he is available for only 40% of his team’s games, he would be paid Rs. 2 Crore. However, when his team’s total salary is determined, the full amount of Rs 5 Crore is taken into account.

Assuming that the salary cap is the real reason as to why teams don’t bid too much for a player (as opposed to capacity to pay), teams will not want to let go of a large amount of their salary cap for a player who is unlikely to be available for the full tournament. Thus, if Sangakkara were to enter the IPL Auction this year, he is likely to be undervalued, and hence he has decided to not take part in the IPL at all.

What Sangakkara is betting on is that in the auction teams will have a short-term perspective, and will be looking at only this year’s commitments in order to determine a player’s availability . Ideally, since the auctions are for purchase of a player for three years, teams should be taking into account the tours scheduled for the IPL seasons of those years (the gap in India’s schedule will show when the IPL will take place, and a player belonging to any country that has cricket scheduled at that time according to this chart will not be available for the IPL). However, perhaps due to the uncertainty in next year’s schedules (thanks to the proposed ICC revamp), teams are only going to take into account this year’s commitments in order to guide their bidding.

Sangakkara has said that he plans to take part in next year’s IPL, and he hopes for a much better valuation then compared to this year, for he will be free of international commitments. Given that the salary cap for the teams increases by only 5% (Rs. 3 Crore) next year, what he will be banking on is that teams might release some high value players they will be employing this year.

Tailpiece: Given that the English domestic calendar invariably clashes with the IPL, English Test players are going to be forever undervalued in the IPL. At least they should be if teams are intelligent about their bidding.

Tailpiece2: Samit Patel and Alex Hales have a deal with their county Nottinghamshire that they will be allowed to play in the IPL only if they can get a fee of USD 400000 (INR 2.5 Crore). They have both put their base prices as Rs. 2 Crore. It will be interesting to see if and how teams go about picking them!

 

Leaving twitter

It has been over three weeks since I signed off twitter. On January 1st, I had left this message on the social network:

 

After that I logged off twitter on all my computers, deleted tweetdeck from chrome and deleted the twitter app from my phone and iPad. I haven’t changed my twitter password, though, so every time I write a blog post wordpress will send an automatic notification tweet (it is likely that some of you are reading this via the automatic wordpress twitter notification).

The reason I logged off twitter was that I was getting addicted. Every time I had a minute or two of free time I would go check tweets. I was constantly on twitter all my waking hours. I would wake up in the morning to the alarm on my phone, and the first thing I would do was to check twitter. It is not unfair to say that twitter had consumed me.

Hence the effort to log off and delete the apps. So far I haven’t faced any withdrawal symptoms. There are times when I pull out my phone and instinctively go for the twitter app. And then I realize it’s not there, and curb my instincts. While working if I need a break I look for tweetdeck in my Chrome, but then realize it is not there.

So far, Facebook has been a good substitute. The advantage of facebook over twitter is that the former has a much more slow-moving news feed. If you check facebook after an hour or two, there will be two or three status updates on your timeline. Essentially when you instinctively click on facebook, it doesn’t become as much of a time sink as twitter used to.

One of  the reasons I would check twitter was for interesting links and articles. In the last 2-3 years some of the best stuff I’ve read online has been recommended to me by people on twitter. However, I have a way of accessing that without accessing twitter itself – I use this app called Flipboard (on both Android and iPad) and that curates articles that have been recommended by several of my followees and shows them to me. I check Flipboard approximately once a day, read some articles and bookmark some others. Thanks to that, I only get the article content on twitter without all the inane commentary and the PJs.

In my last month on twitter, I had logged off for a day on two-three separate occasions. The problem with twitter of late is that it is turning into yet another TV news channel. When there is an event of some interest, all the diversity on your timeline disappears, and everyone starts talking about the same thing. For a while it is good, for you get different perspectives. And then there is more and more of the sameness and can absolutely drive you nuts.

There is one reason I miss twitter though – for sharing articles. For a long time now I’ve liked to share interesting pieces that I’ve read. Back when Google Reader existed and had the “shared items” feature enabled, a number of people requested to be my GTalk friends just so that they could look at my curated “Google Reader Shared Items” content. Since that feature was taken off, though, I’ve resorted to twitter for sharing interesting articles. Now that I’m off twitter (technically Flipboard and Feedly (my RSS feed reader) allow me to share things on Twitter without logging on, but I don’t want to do that) I need another way.

Facebook doesn’t work, since most facebook friends are of a personal kind and won’t particularly be interested in articles on financial hedging (for example) or football formations. I’m not on any of these link sharing systems such as digg or delicious (assuming I’ve understood correctly how those two work), and I dn’t want to add another social network which can be yet another source of distraction. Hence, I’ve come up with an ingenious solution.

Back when Google took off the sharing feature from Reader, their recommendation was that we use Google Plus instead for sharing links. And that is exactly what I use that social network for. I never log on to that, but every time I read something interesting, it goes there. People say Google Plus is like shouting into an empty room. I don’t know (and don’t care) who reads the links I put there. I don’t share links for popularity. I share it because I think someone might find them interesting.

When I first got off twitter, people told me my resolution won’t last. It’s been three weeks already and i’m happy the way things are. I’m much less distracted, and can work better. I have a lot more time to myself. Time that would earlier be spent saying inane things on twitter is now spent in deep thought – and that is a good thing. I used to be a big fan of long lonely walks. Constant interaction on twitter means I don’t do those any more. But now I get more time for myself. On an auto rickshaw ride to meet some friends last evening for example, I just looked around and thought. It was wonderful!

I don’t rule out ever getting  back to twitter but  I don’t see myself doing so in the near future unless there is a very strong reason, and unless I know I won’t get addicted again. Till both these events happen, I remain away from that social network.

Why being on time is a wonderful thing

This post is NOT about Indigo airlines, though I do fly them fairly frequently (approximately once a month). It is about the general culture of timeliness, and how it can help all of us save time and money.

If you and I decide to meet at say, 1 pm tomorrow, what time are you likely to turn up? There are two factors to consider here – you don’t want to be too late since that will create a bad impression in my mind, and you wouldn’t want that. You don’t want to turn up too early, either, for you don’t want to end up waiting for me. So when you plan your travel to the place we are meeting, you will first estimate what time I’m likely to show up and then plan to turn up such that you’ll maximize the probability of turning up between the time I’m expected to show up and five minutes earlier.

Notice how this can change depending upon the culture of timeliness. If you and I know each other, and I know that you are a punctual person and vice versa, we will both make an attempt to time our travel so that we maximize our probability of being there before 1 pm (the appointed time). What if I think that you are perennially late? The problem here is that I need to not only shift the “mean” of when I want to get to the place, but the variance also changes!

Notice that in case I know you are habitually late, I’m unlikely to know precisely when you’re going to arrive. Say I estimate based on our past record that you might turn up any time between ten and twenty minutes after the appointed time. How will I now plan to arrive so that I arrive between five and zero minutes of the time when I expect you to arrive? My travel time to get to the place already creates one level of uncertainty and to that I need to add another level of uncertainty in terms of when you are expected to arrive! Thus, these two sources of variation end up adding up and I will either be late (in case I’m okay wtih that) or end up spending more time just waiting for you!

Essentially, because I know that I cannot precisely determine when you are likely to get there, I assume a variance of when you are likely to get there, and that variance will add to the variance of my travel time and thus I’ll have to give myself a larger buffer so that I need to be on time while not waiting for too long!

This is similar to what people in quantitative finance call “market price of risk”. Let me illustrate that again using travel time as an example. In case 1, travel time from my office to yours has a mean of 40 minutes and a variance of 10 minutes (let us assume it is normally distributed). In case 2, travel time from my office to yours has a mean of 40 minutes (same as above) but a variance of only 5 minutes. Let us assume I want to be on time for the meeting at least 97.5% of the time. What time should I leave in each case?

In the first case, the one sided 97.5% confidence interval for my travel time is 40 + 2 * 10 = 60 minutes, or I expect to take no more than 60 minutes 97.5% of the time. In the second case, however, it is only 50 (40  + 2 * 5) minutes! In the first case, if I want to ensure a 97.5% chance of being on time for our 1 pm meeting, I’ll need to leave my office at 12 noon, while in the second case I can leave a full ten minutes later!

You need to notice here is that in both cases, the average travel time is the same. The only thing that has changed is the variance. In the first case, because the variance of the travel time is larger, I need to leave earlier! Leaving ten minutes earlier is essentially the price I have to pay because of the larger variance!

Similarly, when there is a variance in my estimate of when you will arrive for the meeting, it adds to the variance of my travel time, and the total variance I need to consider for when I need to leave goes up! In other words, simply because there is a variance in when you will arrive for the meeting,  i will have to leave earlier to compensate for your variance!

What if we had a culture of being on time? Then, I would know that with a very high probability you would be there on time for the meeting, and that would reduce my overall variance, and make it easier for me to also be on time for the meeting!

Essentially, a culture of being on time can save time for both of us – simply because it eliminates the variability of when we will end up arriving for the meeting, and this saved time is reason enough to build a culture of punctuality.

Yet you have people who schedule back-to-back meetings that invariably cascade and ruin their reputations of being on time, and thus inconvenience themselves and their counterparties!

Comparing inflation across states

Have you ever wondered which states see higher inflation in a particular period? For possibly the first time ever the government has released data on consumer price indices in various states in india via its open data platform data.gov.in (there are a lot of interesting data sets on that platform. Do check it out if you haven’t already). There is also another interesting data set on the same platform which gives the price indices of various commodities over the last ten years.

Coming back to consumer price inflation across states, let us first look at which states saw the highest and lowest Year-on-year inflation (year on year inflation is calculated by comparing prices in a particular month to the corresponding month of the previous year. This helps remove any distortions caused due to seasonality) in November 2013, the last month for which the data is available.

stateinflation

 

In November 2013, by far the highest inflation was seen in Tripura. Manipur, interestingly, is at the other end of the spectrum. Now, the problem with the above graphic is that it could be hard to search for a particular state, and see if there are any patterns to which states have higher inflation compared to others.

In order to examine if inflation varies by region, we draw a choropleth. In the below map, the more red a state has been coloured, the higher its inflation is, the greener a state is, the lower is its inflation. Middling states are coloured yellow.

Source: http://data.gov.in/dataset/state-level-consumer-price-index-ruralurban-upto-november-2013
Source: http://data.gov.in/dataset/state-level-consumer-price-index-ruralurban-upto-november-2013

Offered without further comment.

Reforming Bangalore’s Public Transport Network

This is based on a twitter rant on the same subject a few weeks back.

Bangalore’s public transport network has traditionally followed a hub-and-spoke model, with three hubs – Kempegowda Bus Station (aka “Majestic”), KR Market and Shivajinagar. It can be modeled, however, as a two-hub system, for Majestic and Market are quite close to each other and thus quite well-connected. It was probably not originally meant to be that way – for bus number 1 (not sure it still exists) ran from Jayanagar 4th Block to Yeshwantpur – basically from the south to the north-west corner of the city. Of course, it passed through Market.

Over time, however, the bus system has moved to an increasingly hub-and-spoke model. The BMTC (Bangalore Metropolitan Transport Corporation) did one exercise a few years back, trying to rationalize routes (it was partly due to an effort led by Ashwin Mahesh of Mapunity). However, while adding useful additions such as the ring routes (the “big circle” and the “chikka (small) circle” routes) and one or two “trunk routes” (that run right across town), what this revised template does is to further increase the primacy of the hubs. For example, the much talked about Big 10 routes are essentially arterial routes running from a point in the middle of town to some place along one of the highways leading out of Bangalore (they are not strictly hub routes, though, since some of them stop a short distance from a major hub).

The increase in primacy of hubs combined with metro construction (the two metro lines will criss-cross each othe at – you guessed it – Majestic!) has completely overwhelmed the hubs. It is impossible (unless you sacrifice copious amounts of time) to change buses at Majestic now, for the amount of time it takes for a bus to get into majestic and for a bus to get out of majestic is too high a transaction cost.

Moreover, changing buses at a terminus is not efficient, given the waiting times involved and the extra transaction costs of getting out of the terminus. What works better is changing buses at an intermediate stop. To use an anecdote, for two years (1998-2000) I traveled to school in Indiranagar (east Bangalore) from my home in Jayanagar (south Bangalore). I would take a bus going to Shivajinagar (Jayanagar-Shivajinagar is well connected – being a hub route) and get off at Richmond circle, from where I would take a bus from Majestic to Indiranagar (again a hub route, so well served). I could change buses while standing at the same bus stop (made things easier), and the frequency of buses on the two hub routes meant I would get to school easily (again the traffic in the 1990s was nothing compared to what it is now). I had the option of changing buses at a hub, but eschewed it due to transaction costs.

Coming back, what we need in Bangalore is to reformat the bus network in a way that mimics the patterns in which people travel. Right now the assumption of the BMTC seems to be that they should connect every area to a major hub, and then let people take it from there. What they do not take into account is that 1. traffic has grown much worse and 2. People put a higher value on their time nowadays, because of which the transaction cost of the old hub-and-spoke model is way too high. What they need to do instead is to design the network based on people flows.

The first step of such reform is to understand the patterns in which Bangalore moves. One way to do this would be via smart ticketing. A few years back buses in Bangalore started introducing smart ticketing machines, and your ticket would be a printout. However, that didn’t take off. If that can be reintroduced (in all buses) and coupled with destination based ticketing rather than leg based ticketing (for example, if I’m going from Jayanagar to Indiranagar via Richmond Circle I get on to the bus in Jayanagar and buy a ticket to Indiranagar directly. The same ticket allows me to travel on any bus between Richmond Circle and Indiranagar. This introduces complexity but can be done). This will give the BMTC information in terms of the routes on which people actually travel. And once that happens, an effort can be made to reformat the bus network.

Trading and liquidity

Every time there is some activity in the football transfer market, you are likely to hear one of two things. Either a particular player was “a steal” or the buyer “overpaid”. You seldom hear that a player was bought or sold at a “fair price”. What drives this?

Note that the issue is not perception – if you look at the transfer dealings, you are likely to find that the general opinion of whether the transfer fee was too high or too low is in most cases fairly accurate. Even if it is not accurate at the time of the transfer, it gets borne out in the subsequent year or two after sale.

Two weeks back I took a class in introductory economics for a bunch of people who hope to get elected to the Bangalore Municipal Council (BBMP). Teaching them about demand and supply, and trade, I mentioned that in any voluntary trade, both the buyer and the seller are “winners”. For example, if Liverpool sold Fernando Torres to Chelsea for GBP 50 million, it means two things: One, the value that Liverpool placed on the future contribution of Torres to the club was less than GBP 50 million. Two, the value that Chelsea placed on the future contribution of Torres was more than GBP 50 million. If either of the above conditions were not true, the deal would not have happened.

So why is it that football transfers usually end up costing too much or too little? The answer lies in “liquidity”. Liquidity is a concept that is normally used in financial markets as a measure of the depth of the market. It measures how many people are willing to buy and sell a particular commodity at a particular point in time. The theory is that the greater the number of buyers and sellers for a particular commodity, the better is the price discovery. I’ve said this several times before – it is unfortunate that the concept of liquidity doesn’t find as much traction in mainstream economics literature.

Coming back to football – why is it that players are typically either undervalued or over valued? Because players are unique, and that makes the market illiquid. Let us go back to the deal that took Torres to Chelsea. Let us say that the value Chelsea placed on his future services was GBP 50 million, and the value that Liverpool placed on his future services was GBP 35 million (numbers pulled out of thin air). Given that Liverpool owned him, this deal could have taken place at any value between these two numbers (note that at any price between 35 and 50 million, both Liverpool and Chelsea would be willing to trade)! So why did the deal take place at one end of the spectrum?

It was a consequence of how badly the two clubs wanted to do the deal. While Torres had lost form and hadn’t been performing in the 2010-11 season, Liverpool were quite happy holding on to him – they were not desperate to do the deal. Even when offered an amount higher than their valuation of the player, they sensed Chelsea’s desperation in doing the deal. So Liverpool’s game here was to hold on long enough until they knew Chelsea had bid an amount they were unlikely to improve on, and then they sold.

Sometimes fans like to sing something like “there is only one Fernando Torres” (typically when he scores). And that is the precise reason that Liverpool was able to get a premium on his sale. There was a certain kind of player whom Chelsea desperately wanted to buy, and Torres was the one who fit the bill perfectly. Given the lack of comparables, and the desperation of the buyer, it became a seller’s market and Liverpool were able to profit from it.

So we have seen here that when the buyer is more desperate to do the deal than the seller, the deal takes place at the higher end of the “value spectrum” (I just made up that phrase at this moment). It can go the other way also. When Liverpool sold Torres, they (rather unwisely) invested most of it buying a player called Andy Carroll from Newcastle United. Carroll turned out to be a dud – he was increasingly injury prone, and when a new manager Brendan Rodgers came in, he found him to be not suitable for the style of football Liverpool wanted to play.

The presence of Carroll in the squad, however, would put pressure on the manager to play him – largely a consequence of the fee that had been paid to purchase him. To this end, Rodgers decided that it was better to cut his losses and remove Carroll from the squad, rather than play a suboptimal brand of football just so that Carroll was played. Rodgers correctly decided that the money that had been spent in buying Carroll was a “sunk cost”.

Now, in his year and a half since his arrival at Liverpool, Carroll had done much to convince people that he was overvalued. His injuries and lack of form meant that clubs were unwilling to value him highly, and given Liverpool’s determination to sell, it was a seller’s market. The GBP 15 million that Liverpool extracted from West Ham for the sale was perhaps exactly the value that Liverpool had placed on Carroll.

To summarize – you sell if the price is higher than your valuation. You buy if the price is lower than your valuation. The buyer’s and seller’s valuations together determine the “value spectrum” along which a sale can be done. Presence of comparable commodities means that people can go for substitutes, and so that shrinks the value spectrum. In case of footballers with few comparables, there are no factors compressing the value spectrum, and the full extent of it is available.

In a large number of cases, one of the buyer and seller is much more desperate to do a particular deal than the other. And that pushes the price of the deal to one of the edges of the value spectrum. Hence people end up either significantly underpaying or significantly overpaying for footballers.