How to Spend Your Allowance

A house is on fire.  The fire department is afraid it will spread to other houses. A local politician is called to observe the fire in order to assess the damage in hopes he can do something to prevent future fires. Here is the problem: rarely is it smart to throw money at the problem because money burns as well as most other forms of kindling.

Due to the lack of a salary cap, Major League Baseball teams are allowed to pay their players as much money as they want. It allows for great diversity amongst the teams' total payrolls. For example, the New York Yankees spent $197,962,289 on their players this season. The Yankees generally spend the most money of any MLB team on their players, and with numerous playoff appearances and World Series titles they reap the benefits on the field. In comparison, teams like the San Diego Padres, Tampa Bay Rays, Pittsburgh Pirates, and Oakland Athletics find themselves consistently at the bottom of payroll lists.

I began looking through the payroll lists* in order to find a trend- some pattern that would prove interesting. First, I used www.Baseballprospectus.com which uses simulations and models to estimate the number wins and losses for each team at the end of the season. Next I plotted each team's 2012 payroll against the number of wins that the guys at Baseball Prospectus estimate each team will have by October 1st. I plotted the best-fit line and even calculated the R squared value. Here are the results:

If you would like to see the data used in this graph click on this: LINK

My sole conclusion from the graph and the results collected is that there is very little connection between a team's wins and the amount of money they spend to put together a team. The R-squared value indicates only 7% of the variation of wins is explained by the results The lowest point represents the Houston Astros. That team has spent the third fewest dollars, and due to their abysmal results, find themselves in the cellar. Here are some other interesting facts that came from these data:

•  The Yankees have the highest payroll in the Majors, and pay about $2,062,107 per win 
• The Phillies have the 2^nd highest payroll in the Majors, and pay about $2,266,739 per win
• The Padres have the lowest payroll in the Majors, and pay about $781,396 per win 
• The Athletics have the 2^nd lowest payroll in the Majors, and pay about $661,559 per win  
• Finally, the Nationals have the best record in the Majors, and the 19^th lowest payroll. They pay about $823,240 per win

Without a doubt, the Nationals have got the best return on their investment this season. That conclusion makes some sense in that the Nationals have numerous young players without large contracts who have a lot of talent and have performed at a high level this season. In comparison, the Philadelphia Phillies have an extremely high payroll and have severely underachieved in the National League East. 

So, does money win championships? The answer is sometimes. Does a low payroll filled with young players win championships? Same answer, sometimes. Overall the only question to ask that doesn't incur a similar answer is, "What is the best formula to use?" The only answer to that question is build a smart team. If management makes intelligent decisions that balance spending with results and predictions, it gives an organization the best chance to succeed. Oh, and don't forget about luck. 

*All team payroll data was taken from USA Today's tabulation of sports team's payrolls (Link)

Now What? Part III

"Now What" has been a series of articles concerning the financial woes and successes of professional athletes after retiring from sports.  Let's recap.  Part I focused on athletes who lost it all, spent/invested unwisely, and could have considered burning their money as a better alternative.  Part II went down the other path, exploring the post-athletic careers of Magic Johnson, Mo Vaughn, and others.  These men put their millions to good use, helping communities and turning a profit at the same time.  The third and final installment focuses on the future.  Will former athletes continue to make headline news with their financial blunderings, or will something change?

Professional athletes make incredible amounts of money.  With average salaries going up every year, being drafted gives athletes the opportunity to make more money than many Americans will make in their lives.  Although most people rightly see this as a blessing, it has also become a curse.  Athletes are seen as rich playboys who spend their money on all sorts of frivolous and unconscionable mansions, cars, and other toys.  Few people see the likes of Warren Buffet, Bill Gates, or Michael Bloomberg in a similar light.  Instead these billionaires transcend their own money, seen as smart and prudent instead of vacuous.  So far, I have delved into the many causes of this irresponsible spending and investing on the part of former professional athletes, but I have not given a forecast for the future or a comprehensive way to solve these issues (education being the only solution I previously referenced).  



Athletes, like presidents, should have both a keen mind and good advisors.  To expect every professional athlete to be schooled in post-keynesian economics, or how global trade effects their annual salaries is a futile task.  On the other hand, it would not be unreasonable for every professional athlete to read a chapter of "Freakonomics" or "Personal Finances for Dummies" every week.  Professional athletes, who have just entered the world of the upper class, should have a rudimentary understanding of taxes, investments, and banking.

We all have certain predispositions from our childhoods, whether we were originally dirt poor or wealthy, that cause us to make certain decisions.  Situations arrise, such as the poor black basketball star who wants to buy his mother the house she could never afford, or the Yale graduate who uses his money to set up trusts for the children he hasn't borne and the wife he has yet to marry.  Both scenarios have validity and neither necessarily constitutes a bad decision.  An athlete should be able to buy his mother a mansion, but simultaneously understand that he cannot buy every friend from his neighborhood one as well.  Limits exist, and as the old adage goes, everything in moderation.  These are lessons every athlete should learn.  Not only should these newly minted millionaires have at least a minor knowledge of money, they should hire the right people to oversee their wealth on a day-to-day basis.  Making your best friend your financial advisor probably won't work unless he recently received his MBA from Wharton.  Hire a team of financial advisors to manage your considerable wealth, it's exactly what most upper-middle class and upper-class Americans do.

Luke Skywalker

In Star Wars, Luke Skywalker is depicted as the only remaining hope to save everyone from the evil empire.  George Lucas' first film is titled "A New Hope".  Don't worry, I don't think I've found the one athlete who will save the rest from financial ruin, but I do think Andrew Luck should be the next poster child for "best financial decisions made in a career".  Nothing has been written in stone, much of this is speculation. 


Andrew Luck, son of Oliver and Kathy, brother of Addison, Mary Ellen, and Emily Luck, and the most recent quarterback to be chosen number one overall in the NFL draft, possesses immense talent, intelligence, and upside.  When the Indianapolis Colts selected Luck no.1 overall in the 2012 NFL draft, they knew what they were getting.  They wanted the next Peyton Manning, and from most accounts and predictions, Luck may be a Manning look alike.  He stands 6 foot 4 inches tall, weighs about 230 pounds, throws a football at the speed of an intercontinental ballistic missile with the accuracy of a skilled marksman.  His athletic abilities are only matched by his gifted mind.  Luck was co-valedictorian of his high school class, entertained scholarships to Northwestern, Rice, and the University of Virginia, and chose to attend Stanford University.  

Andrew Luck

By all accounts, the 22-year old is athletic, smart, and a soon to be inductee into the select group of professional athlete millionaires.  Will Luck be smart with his money?  He comes from solid stock.  Luck's father, Oliver, played quarterback in the NFL for the Houston Oilers.  After retiring, the senior Luck received his law degree from the University of Texas, and moved to Germany to practice law.  Following an unsuccessful run at a seat in the United States Congress, Oliver Luck was named the CEO of the Houston Sports Authority.  Next, he took a position as the athletics director of his alma mater West Virginia University.  So, it seems young Andrew has a pretty good role model to look to for guidance in both his athletic and post-athletic pursuits.  Luck has a good advisor, but how about his personality?  According to an article in USA Today, Luck rode his bicycle around the Stanford campus instead of toting an expensive car.  He decided to forgo the NFL after his junior year of college to return for his senior year.  Luck graduated with a bachelors degree in architecture, carrying a 3.48 GPA while studying his other major, football.  


So it seems like this young man has the makings of someone who will not only succeed on the field but off of it as well.  He has a good head on his shoulders, strong role models, a great arm, and most importantly a solid attitude.  If ever there was someone whom young athletes should emulate, it is Andrew Luck.  I predict that, no matter the direction his football career takes, Luck will be successful in many spheres, especially financially. 


Well, folks, this trilogy has now come to an end.  I've profiled financial dunces like Curt Schilling and Allen Iverson, movers & shakers like Magic Johnson and Mo Vaughn, and the star of the future, Andrew Luck.  All of these men have one thing in common.  They all played or will play professional sports.  In fact, they have succeeded or most likely will succeed in their given sport.  The X-factor with these men, and all professional athletes, remains the manner in which they treat their status of "wealthy".  Education, solid role models, and above all else a strong attitude constitute the most important factors of financial success, even for those with the most money.