How Football Explains Financial Fraud
July 17th, 2009
July 17th, 2009
Some people think American football is a vile parade of violence and athletic mediocrity. I think it’s one of the world’s most thoughtful sports. During your average game, one hour is spent moving and the other two are spent carefully orchestrating the next move. It’s fascinating. Like chess. But instead of inanimate objects, the pieces are attractive men in spandex. Well… some of them anyway.
Football’s also a great way to understand financial fraud.
Wednesday, former Tennessee Titan Reed Diehl pled guilty to a $5 million Ponzi scheme charge. Like a mini- Bernie Madoff, Diehl was gathering money from investors and using it to repay earlier investors or to finance his extravagant lifestyle. Diehl was originally charged in March of 2008, arrested, and released on bond. The ex-Titan promptly tried to buy a house for $3.5 million, using a fake name and some else’s security number. His bond was revoked. He now faces a prison sentence of 20 years.
Non-Economists might think this is irrational. Why would a man, already wealthy from a career in the NFL, need to run a scheme (with a high likelihood of incarceration) to make more money?
The answer is risk. To the coaches, football is about weighing risk against benefit and probability of success. To the players, it’s about thrusting into a play, with risk of injury coming second to the goal. A study found that about half of all NFL players are injured at some point during the season. In the four year study 652 players suffered a head, neck or spine trauma. Joint and bone trauma was common and often crippled these players later in life. Of the vast pool of athletes in the country, only an elite few make it to the NFL, where they garner fame, fortune, and often numerous injuries.
So how does this explain fraud and finance?
Economists call football players risk preferers, which means they get more utility (gratification) from each additional dollar than they did from the dollar before it. Most people are risk adverse. For example, if I gave you $1 million you’d be really happy. You’d go buy a house or a fast car or maybe 10,000 copies of Michel Jackson’s Greatest Hits. Now, what if you had $50 million and I gave you another million? Does that 51st million feel as good as the 1st one did? Probably not. But for some football players, the 51st million feels better than the 1st one. That’s called risk preference. And it makes them inclined to risk almost anything to make more money, including health and incarceration.
Other risk preferers include Bernie Madoff, Marc S. Drier, and James M. Davis, who also used schemes to generate untold amounts of wealth for themselves at their investors’ expense. They didn’t stop, even after earning billions of dollars. Their crimes were also ostentatious and risky. Drier, for example, was initially arrested for trying to impersonate an employee of Ontario Teachers’ Pension. And James Davis, once considered one of the richest men in America, is now penniless. Talk about risk.
So what does the former NFL player Diehl have in common with investment schemer Bernie Maddoff? They’re both risk preferers. They both made millions of dollars at the expense of innocent people. And they’re both going to jail.