The Louis-Schmeling Paradox


Why do we go to sporting events?

The reasons to stay home are obvious. Here’s my list, in mostly random order: a beer costs $12, the view is better from my couch, die-hard fans can be scary, the price of parking, post-game traffic.

That’s a pretty persuasive list. And yet, as I stare into my high-resolution television, I still find myself hankering for the live event, jealous of all those people eating bad nachos in the bleachers, or struggling to see the basketball from the last row. It’s an irrational desire - I realize I should stay home, save money, avoid the hassle – but I still want to be there, at the game, complaining about the cost of beer.

In a classic 1964 paper, “The Peculiar Economics of Professional Sports,” Walter Neale came up with an elegant explanation for the allure of live sporting events. He began his discussion with what he called the Louis-Schmeling Paradox, after the epic duo of fights between heavyweights Joe Louis and Max Schmeling. (Louis lost the first fight, but won the second.) According to Neale, the boxers perfectly illustrate the “peculiar economics” of sports. Although normal business firms seek out monopolies – they want to minimize competition and maximize profits – such a situation would be disastrous for a heavyweight fighter. If Joe Louis had a boxing monopoly, then he’d have “no one to fight and therefore no income,” for “doubt about the competition is what arouses interest.” Louis needed a Schmeling, the Lakers needed the Celtics and the Patriots benefit from a healthy Peyton Manning. It’s the uncertainty that’s entertaining.

Professional sports leagues closely follow Neale’s advice. They construct elaborate structures to smooth out the differences between teams, instituting salary caps, revenue sharing and lottery-style drafts. The goal is to make every game a roughly equal match, just like a Louis-Schmelling fight. Because sports monopolies are bad for business, Neale writes that the secret prayer of every team owner should be: “Oh Lord, make us good, but not that good.”

It’s an alluring theory. It’s also just that: a theory, devoid of proof. Apart from a few scattered anecdotes – when the San Diego Chargers ran roughshod over the AFL in 1961 “fans stayed away”– Neale’s paper is all conjecture.

Enter a new study by the economists Brad Humphreys and Li Zhou, which puts the Louis-Schmeling paradox to the empirical test. Humphreys and Zhou decided to delve into the actual numbers, looking at the relationship between league competition, team performance and game attendance. Their data was drawn from the home games of every Major League Baseball team between 2006 and 2010, as they sought to identify the variables that actually made people want to buy expensive tickets and overpay for crappy food.

What did they find? In “Peculiar Economics,” Neale made a clear prediction: “The closer the standings, and within any range of standings, the more frequently the standings change, the larger will be the gate receipts.” (Neale called this the “League Standing Effect,” arguing that the flux of brute competition was a “kind of advertising.”) However, Humphreys and Zhou reject this hypothesis, as they find that changes in the standings, and the overall closeness of team win percentages, have absolutely no impact on game attendance. Uncertainty is overrated.

But the study isn’t all null results. After looking at more than 12,000 baseball games, Humphreys and Zhou found that two variables were particularly important in determining attendance. The first variable was win preference, which isn’t exactly shocking: fans are more likely to attend games in which the home team is more likely to win. If we’re going to invest time and money in a live performance, then we want the investment to pay off; we don’t want to be stuck in post-game traffic after a defeat, thinking ruefully of all the better ways we could have spent our cash.

The second variable driving ticket sales is loss aversion, an emotional quirk of the mind in which losses hurt more than gains feel good. According to Humphreys and Zhou, loss aversion compounds the pain of a team’s defeat, especially when we expected a win. This suggests that the impact of an upset is asymmetric, with surprising losses packing a far greater emotional punch than surprising wins. The end result is that the pursuit of competitive balance – a league in which upsets are common – is ultimately a losing proposition for teams trying to sell more tickets. Instead of seeking out parity, greedy owners should focus on avoiding home losses, as that tends to discourage attendance at games.*

And so a familiar tension is revealed in the world of sports. On the one hand, there are the collective benefits of equality, which is why sports leagues aggressively redistribute wealth and draft picks. (The NFL is a bastion of socialism.) However, the individual team owners have a much narrower set of interests – they just want to win, especially at home, because that's what sells tickets.

The fans are stuck somewhere in between. While Neale might have been mistaken about the short-term motives of attendance – we want Louis to knock the shit out of Schmeling, not witness a close boxing match – he was almost certainly correct about the long-term impact of a league with a severe competitive imbalance. (It’s exciting when the Warriors are 23-0; it’s a travesty if they go undefeated for an entire season.) Sports fans might not be drawn to uncertainty, but they sure as hell need hope. Just ask those poor folks packed into Wrigley Field.

*Baseball owners should also invest in pitching: teams that give up more runs at home also exhibit lower attendance.

Neale, Walter C. "The peculiar economics of professional sports: A contribution to the theory of the firm in sporting competition and in market competition." The Quarterly Journal of Economics (1964): 1-14.

Humphreys, Brad, and Li Zhou. "The Louis-Schmelling Paradox and the League Standing Effect Reconsidered." The Journal of Sports Economics. (2015) 16: 835-852