Hayek’s Institutional Knowledge Problem, Basketball Recruiting, and Why So Many Kids Transfer
I’m writing a blog post that mentions Hayek and I don’t have a bad goatee. My next article will be on paradoxes and for all of your sakes it’s a good thing I’m allergic to cats or Schrodinger may or may not have rolled over in his grave when he read it. But I digress.
Hayek was a political philosopher who supported free market economics as the most efficient method for asset allocation. Let’s say you go to Lowe’s and want to buy a new lawn mower. You know a little bit about lawn mowers, but that’s all.
Several factors will affect your decision.Those specific factors will be different from most anyone else looking to buy a lawn mower. You can fall back onto heuristics. These include:
Price Signaling: The more expensive a mower is, the harder it is to get. This implies quality and/or a degree of specialization.
Word of Mouth: Your neighbor Joe Smithsonian’s Wal-Mart brand mower broke down several times. If only that was all he talked about. You now know to avoid Wal-Mart brand mowers.
Scarcity: If there is a high demand for an item that is in production but you still can’t find it, demand is likely high. That indicates the mower is good. If you can buy one, you’re going to be all set for that backyard barbecue.
Design: Arranging lines and spaces in certain patterns leads to a more pleasing vision. A Porsche brand mower with clean lines would be great. It would also let you status signal to your neighbor Joe Smithsonian that he’s more like Joe National Stamp Museum.
All of these and many, many, many other factors affect each person’s decisions.
How Does This Apply to Basketball?
Basketball recruiting is a necessarily symbiotic relationship. Players are selling their playing ability in return for sundry items. Everyone knows Shaq got paid at LSU, but there are still ethical coaches in college basketball who play within the NCAA rules. Because they can’t pay cash to student-athletes, they offer other incentives, (facilities, academics, fans, adoration by co-eds, etc etc etc). This leads players to falsely value their own ability. These incentives are fairly evenly distributed, while true market based incentives are on a log scale, e.g if I’m 10x better than you at something (or someone wants my abilities 10x more) I’ll probably get paid n¹⁰ dollars for it, not 10x the dollars. (That’s why Fortune 500 CEOs get paid that much, they’re better at getting bail outs from the government)
While the best players in college basketball are undervalued in terms of compensation, the average players are wildly overcompensated. They receive the same pay as the top producers while they are worse at their job and less valuable. These players are also sellers of a product, their games. They are a Wal-Mart lawn mower that is consistently selling for the same price as as this bad boy:
These average to below average players are feted like they’re the best players their age in the world, and shown all the bells and whistles on recruiting trips, because there is no put up or shut up time. As Tom Cruise said when he played “Tom Cruise plays a Sports Agent” on Jerry Maguire but wouldn’t have said if he was a high school recruit:
Now, those players enter college, and find out that they’re not that good. Yet, they rationalize that it’s the system’s fault because they are working hard and clearly they are just as good as the other players because they’re getting paid the same. So they leave. Impediments to knowledge flow lead to a higher transfer rate in college basketball. No player in a market ever has perfect knowledge to begin with, and every distortion makes that information more imperfect.
Not that a high transfer rate in college basketball is necessarily a bad thing. But that’s why it happens.