The Power of Incentives in Sports
7 minute read · Issue Number 126 · June 24th, 2022
Incentives are the force that makes the world spin. It drives individuals and holds the power to create great outcomes within any system.
The basic rule on incentives is that you’ll get what you award for – Charlie Munger and Warren Buffet built and grew their businesses under this mental model.
Similarly, a system with a short-term mentality or with broken incentives will turn many good people into bad, bankrupt companies or even break countries apart.
But what role do incentives take within the realm of professional sports? How much influence can incentives have to determine the quality of a professional tournament, league winner, cup, title, or medal?
Let’s dive into it.
Incentives are everywhere. Some are more obvious than others, but if you pay attention, you’ll be able to see them. They’re what sets the path for a system. Limits and pushes.
There are different types– intrinsic vs. extrinsic, financial vs. non-financial. And they can come in different shapes and forms, such as awards, privileges, recognition, or punishments and consequences as well.
It’s what motivates people to do things. They explain why you study a career, go to work, why you work out, hang out with friends, gamble at the casino, travel the world, follow the stock market, pay taxes, etc.
If an action has no positive incentive, you probably wouldn’t do it. Why would you? People learn to avoid actions that underpin negative incentives – this is known as the science of reinforcement:
“If we don’t like the consequences of an action we’ve taken, we’re less likely to do it again; if we do like the consequences, we’re more likely to do it again.”
“It’s a type of learning in which the strength of a behavior is modified by its consequences, such as reward or punishment.”
A system is responsible for establishing incentives through rewards and punishments to allow it to function with order and direction.
Incentives in Professional Sports
Professional sports are filled with incentives to stay competitive, keep a reputation, provide quality entertainment, and attract the best talent, partners, and technology to ultimately generate revenues.
Soccer leagues keep themselves competitive through relegation and promotion systems that punish the worst-performing clubs each season and award the best-performers from second divisions by promoting them to the top leagues.
Teams motivate their coaching staff and players by offering attractive bonuses in their contracts conditioned to different forms of individual and group success.
Different tournaments have prize money funds that award teams based on how far the team makes it, allowing them to earn more the closer they get to the cup.
These are all broad observations of incentive structures within sports, but let’s take a look at more tangible, real-life examples:
UEFA Champions league pays €9.5m to every team that makes it to the Round of 16, €19m to the winner, and €15m to the runner-up.
The NFL has a player’s code of conduct list of dozens of violations with their respective fines, created to control (to some extent) the way players behave in games:
NHL players participating in the playoffs are eligible to share in the league’s playoff pool system. All 16 teams in the postseason share it, and the Stanley Cup winners get the largest individual cash prize.
Wimbledon prize money for their 2022 tournament:
If a Formula 1 team replaces certain car parts outside permitted limits, they are punished with grid position penalties. Other breaches in regulations can lead to monetary fines, time penalties, and others.
These are only a few, but the industry is full of incentive structures that aim to provide direction and order inside and outside the playing field.
Once you see them, you cannot unsee them. Incentives are everywhere.
In professional sports, they exist at every level – from the rules and natural setting of the game to the competitive format and structure of the tournaments.
Incentives have the power to shape behavior and align people and organizations with the system’s goals. Think of a sports team, league, or organization that feels successful. Want to understand why? Take a look at their incentive structure.
The inverse is also true. A broken incentive structure breaks the system. And corruption usually happens when the system is too weak to establish or manage the right incentives.
🎙 Halftime Snacks Podcast
Adam Bates leads the investments in sports & entertainment for SuRo Capital.
SuRo is a VC fund that seeks capital gains from private equity investments based on promising high-growth, venture-backed investments across different industries – including sports & entertainment.
In this episode, you’ll learn more about Adam's story, his experiences at SuRo, and how he finds great investments and entrepreneurs in sports. We also discussed how inflation, rising interest rates, and disrupted supply chains influence the VC business & Adam's work at SuRo.