More on Optimal Sequencing: Soccer Edition

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[Cross-posted at: Wages of Wins Journal, 7 August 2014]

This earlier Wages of Wins piece by Shane Sanders (July 29, 2014) generated plenty of discussion. It highlighted the problem of Triathlon deaths in the swim leg. One crucial point to make with many economic policy analogies on which to draw is that sequencing of the legs (or phases) matters – all other considerations aside, the ‘best’ sequence of phases can be optimized according to some objective (in this case, minimizing fatalities).

One such possible economic policy analogy is with respect to unemployment benefits. Imagine a two-phase policy, where in the first six months the recipient is eligible to a relatively unrestricted entitlement of an amount according to some predefined percentage (say 40%) of some benchmark (average weekly earnings or minimum full-time wage). If the recipient is still unemployed after the 6 months have elapsed, a second phase kicks in at which the benefit is now highly restricted thereafter (having to satisfy minimum job search requirements, etc.) and/or reduced in value. Now, many people will disagree as to whether this two-phase policy is too generous or too miserly (or even on the basis of something else entirely). However, one aspect most of us would agree on is that swapping the sequence of these two phases would make absolutely no sense whatsoever.

It got me thinking about other such analogies about sequencing from sport that could be useful in policy circles. Recently, I published an article in the December 2013 issue of Journal of Sports Economics [gated], along with Jan Libich (my colleague at La Trobe) and Petr Stehlίk (University of Western Bohemia, Czech Republic). We took on soccer’s penalty shoot-out problem.  In knock-out matches that are tied after 90 minutes, the following 30 minutes of overtime is often beset with overly-defensive play due to insufficient incentive to attack.   This means that overtimes often finishes goalless, and that nearly 50% of the time, the match is decided via penalty kicks anyway (put differently: in nearly one of every two ties, overtime fails to achieve the one and only thing it is fundamentally there to do).

We show that an alternative sequence – regulation time followed by a penalty shoot-out followed by overtime – improves attacking outcomes. The qualification is that, while the shootout produces a winner – you still play overtime, with the winner of that winning the contest as currently. It is only when overtime fails to resolve the deadlock that the winner becomes the team that had won the shootout already (think of winning the shootout as worth half-a-goal lead at the start of overtime).

Specifically, we show that the probability of at least one goal being scored in overtime rises by approximately 50% (depending on the underlying characteristics of the match). Exactly how we estimate the effect of a policy that’s never existed is outlined in the paper for those of you who are interested to read further.

Coming back to sequencing, why the simple economic intuition (as well as the data) says this rule change will likely work is the following: there will always be one team chasing the next goal, because they will be eliminated unless they do – they have little else to lose. While the other team may correspondingly become more defensive, we show the net effect to be overwhelmingly positive. Furthermore, what you will no longer get are those overtimes where both teams sit back having jointly overestimated the probability that they will win if it goes to a shootout.

Had Mario Götze spurned that chance just minutes from time in the recent World Cup final, and it had have instead gone to spot kicks, the penalty shootout problem would now be far higher on the soccer agenda. Nonetheless, better public policy (optimal sequencing included) should never be far from the agenda, so I hope to see more studies like this make some impact in the broader public policy debate.

Peter Phillips Workshop

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Today, I was fortunate to have had the privilege of attending the Workshop on Econometric Theory and Methodology at Monash University’s Department of Econometrics and Business Statistics. The guest of honour was the most esteemed econometrician, Professor Peter C B Phillips. It was fantastic to see a number of presenters throughout the day do justice to Phillips’ achievements via their own respective works – a wonderful event. Bravo Monash and Peter Phillips!

Not Everyone Wins when Interest Rates Fall

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[Archived from: The Conversation, 1 May 2012]

In the likely event that the Reserve Bank Board chooses to ease the target cash rate by 25 (or even 50) basis points later today, it is almost guaranteed that all of the major daily newspapers around the nation will provide an overwhelmingly glowing assessment of the Board’s monetary policy decision on behalf of the Aussie battlers, who will breathe a collective sigh of relief.

Indeed, we may be treated to headlines reporting a cut analogous to “RBA Christmas Cheer”, the likes of which we saw after the last rate fall in December last year (also in the same month of 2008, 2001 and 1998); we may even see cartoons depicting Glenn Stevens as and the other Board members in a very flattering light.

The tendency of media outlets, print and otherwise, to almost unambiguously characterise interest rate decreases as good and increases as bad ensues irrespective of whether such a decision is truly the best call to maintain inflation within the target band and ensure full-employment in the medium-term.

However, not everyone will be celebrating, should it comes to pass as predicted. We need only to refer to the basics of credit markets for this to become apparent – contrary to popular belief; interest rate cuts (likewise increases) create both winners and losers.

Specifically, when banks pass on a rate cut to their customers, it benefits borrowers – even those with a smaller amount of savings. However, it is to the detriment to net savers, whose returns on those savings fall. Could it be that most columnists fall into the former category?

As for the argument that a fall in market interest rates is supposed to be good for future economic activity, the danger is that market rates may already be lower than the optimal levels for medium-to-longer term growth. If so, the current injection of economic activity produces heavier recessionary pressures later, not to mention the threats of inflation and economic volatility.

The disclaimer is that in reminding readers of this, I am someone who would like to own their own property but, for the time being, feels having been frozen out of the home ownership market by significant past price rises fuelled by more aggressive (but arguably less-creditworthy) borrowers. Hence, one falls into the net saver category.

As schadenfreudian as it may sound, I would personally love to see a rate rise this afternoon, followed by further hikes in the coming months, until defaults in credit markets clear out all the suckers who should not have outbid me in each of those auctions in the first instance. Then, property prices will return to levels consistent with the underlying fundamentals.

The lament that one feels about the asymmetric media coverage is that it seems to pander predominantly to the significant proportion of their readership that are net borrowers, and increasingly so: the 2006 census revealed that 64.8% of all private dwellings in Australia were owner-occupied, down slightly from 66.4% in 1996.

More strikingly, the proportion of these properties owned outright declined significantly over that decade, from approximately 62% to 51%, which in turn means that more homeowners have mortgages. The impending release of data from the most recent census in August last year will shed further light on this emerging trend.

The balance of power may be starting to change, however, with the ranks of self-funded retirees set to expand in the coming years, as the baby boomers begin to retire in greater numbers, combined with a higher propensity to save for retirement by successive generations of workers.

Should demographic change eventually bring about such redistribution in media consumption influence from borrowers to savers, then media providers may think twice about how they spin their coverage of interest rate changes and monetary policy generally.

In the meanwhile, net savers should to be reminded that they can exert their influence by sending letters to the editor of their favourite newspaper, demanding that the reporting of such issues be more objective to both sides of the balance sheet.

UPDATE: The Reserve Bank of Australia has cut Australia’s official cash rate by a larger-than-expected 50 basis points, to 3.75%.

Another ‘ABC News Breakfast’ Newspaper Segment

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I appeared again on (today’s edition of) ABC News Breakfast with Michael Rowland and Virginia Trioli discussing a handful of notable newspaper stories (details below).

WATCH ON YouTube

Liam Lenten – third time on ABC1 News Breakfast, discussing the Mining Tax, Surpluses in the University Sector and two Cricket-Related Stories.