Tuesday, December 15, 2009

The Impact of Money in Sports: Correlation or Causality?

According to the Wall Street Journal's sports metrics column, The Count, the NHL shows the strongest link between team payroll and winning percentage of all professional sports. It's a provocative and counter-intuitive conclusion, as many sports fans assume that baseball is most impacted by financial disparities between big-city teams and other, smaller market competitors.

The column compares the correlation between payroll and winning percentage in the 4 major sports:

  1. NHL shows the highest correlation between payrool and winning: .49
  2. MLB places a close second at .43,
  3. The NBA and NFL lag behind at .24 and .15, respectively.
I'm intrigued, but also skeptical, and most of all curious to see more comprehensive analysis of the dynamics at play here. Glad to see the info, but several "open questions" remain:

  1. Causality: since correlation does not prove causality, it may be premature to conclude (as the column does) that in the NHL "More Dollars Equal More Wins." What if causality runs in the other direction, with winning teams earning more revenue, which they in-turn spend retaining their best players?
  2. What's The Mechanism?: how does extra money generate additional wins? If the NHL is really the league where money buys success most consistently, how is that investment achieved? One could think of this as the "Return on Investment" on professional sports payrolls....
  3. Role of Sabermetrics? -- In most businesses, ROI is higher when investments are better screened and selected. Facts and analysis are used to make better decisions which achieve superior returns. This is where the NHL and MLB are especially different: player-valuation metrics are advanced and heavily used in Baseball, while they are less well developed in the NHL. I'm curious to investigate further how the "metrics environment" affects ability of team owners to "buy wins" in one sport versus another....
  4. Effects of League Financial Structure?: the financial dynamics, salary cap rules, and revenue-sharing arrangements vary significantly amongst the professional sports leagues. What impact might those differences have on the "causal impact" of money in each league?
Posted By:
Jaime FitzgeraldAlex Roberts