Most of Malcolm Gladwell’s appearances in this blog involve me complaining about his various writings (such as my review of Outliers), but his recent piece on the NBA lock-out is a gem (HT Rob Brooks). I wish I could write like that.
Gladwell argues that owning a sports team is akin to owning a painting – there are benefits beyond the monetary. He writes:
Pro sports teams are a lot like works of art. Forbes magazine annually estimates the value of every professional franchise, based on standard financial metrics like operating expenses, ticket sales, revenue, and physical assets like stadiums. When sports teams change hands, however, the actual sales price is invariably higher. … Forbes is evaluating franchises strictly as businesses. But they are being bought by people who care passionately about sports — and the $90 million premium that the Warriors’ new owners were willing to pay represents the psychic benefit of owning a sports team. If that seems like a lot, it shouldn’t. There aren’t many NBA franchises out there, and they are very beautiful.
The big difference between art and sports, of course, is that art collectors are honest about psychic benefits. They do not wake up one day, pretend that looking at a Van Gogh leaves them cold, and demand a $27 million refund from their art dealer. But that is exactly what the NBA owners are doing. They are indulging in the fantasy that what they run are ordinary businesses — when they never were. And they are asking us to believe that these “businesses” lose money. But of course an owner is only losing money if he values the psychic benefits of owning an NBA franchise at zero — and if you value psychic benefits at zero, then you shouldn’t own an NBA franchise in the first place. You should sell your “business” — at what is sure to be a healthy premium — to someone who actually likes basketball.
Having praised Gladwell, I should note that he does miss an obvious explanation for the “psychic benefits” of owning a sports team (although most of the literature on psychic benefits also misses this element). Owning a sports team is a form of conspicuous consumption. It is a signal of wealth.
The additional cost of an NBA team over its value as a business is a nice illustration of an important element of a reliable signal – waste. It is only a truly wealthy man who can afford to tie up $90 million of capital in the premium he pays for the Warriors. If the money paid for the team represented a prudent investment, someone of less wealth might buy it (including by convincing a lender to give them the money). That potential return on $90 million invested in productive uses is the amount of waste required to fend off the next most wealthy man in the bidding for the team.
So, now that the NBA owners are complaining, we can assume that they are not as rich as their signal might suggest. I have an alternative to Gladwell’s recommendation. Instead of selling the teams to someone who actually likes basketball, the owners should sell their “business” to someone who actually has the wealth representative of the signal they are making.