Thursday, November 18, 2010

Trends of the Era

Two big trends that have ruled so much of our world, for better or worse, for the past decade or so: first, the increasing quantification of just about everything you can count; second, the increasing belief that everything that can be turned into a financial instrument, it should be.

It’s in the latter vein that I found this New York Times article about investors from the United States going into the Dominican Republic and funding baseball schools, in exchange for taking a cut of whatever signing bonuses are signed by the prospects upon entry into MLB (the NYT estimates up to 50%.) There’s a short version and a long version of this. The short version is to watch the very good Sugar, about one of these Dominican’s struggles in the minor leagues. The longer version is that this is exactly the type of possibly-good thing that will almost certainly be abused quite often.

What’s unmentioned in the article is how precedented this all is: the Times wrote this story two years ago, about soccer, about the very unfortunately-named “Traffic Sports,” an organization which buys players’ economic rights, then sells the rights off to the highest bidder after having those players play for a while in the equivalent of minor league teams that they control on their own. And of course there’s a relatively high-profile cautionary tale—the U.S. national soccer team’s Gale Agbossoumonde hates the organization so much he’s willing to go on-record about it while they still control his economic destiny.

In theory, the idea works as financial engineering: it’s to athletes what venture capitalists are to startups—just as a venture capitalist proves capital and individual knowledge and guidance to further both people’s economic prospects, so Traffic and the buscones (the Dominican term for these baseball schools) invest money early on and provide the knowledge and guidance to help navigate a complicated world.

But just as the theories of economics often break down when confronted by social reality (and need modification by other theories of economics, and whatever other social science is relevant), so too does this little piece of financial wizardry break down when applied to athletes—there’s a difference between startup founders and the vast majority of athletes in these buscones or owned by Traffic (was there anyone with an MBA in that organization who could have pointed out the unsavory connotations of the name?) that’s revealed by the egregiousness of calling your agency “Traffic Sports”: most of these Brazilian or Dominican athletes are very poor. That’s the point of giving them some money upfront, and that’s the theory of it too. The problem is that people with money are generally institutionally savvy whereas people without money generally aren’t. The asymmetry in information is ripe for exploitation, and so you shouldn’t be surprised when these people often do just that.

I’m not sure there’s many, if any, specific solutions for this beyond simply making sure there are fewer people who are poor, and fewer people who don’t have much institutional capital to draw upon, but it’s another helpful reminder of the costs there are to being poor.

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