Was spending £49 million irrational?

Manchester City have paid a remarkable £49 million for the Liverpool winger Raheem Sterling. A player who scored just 7 goals last season. This appears to be an irrational amount – certainly compared to top performers such as Chelsea’s Player of the Year, Eden Hazard, who was bought for around £35 million.

Of course we know from Behavioural Economics that our decisions are open to influence, bias and depend on the choices we have in front of us. So with the lens of Behavioural Economics let’s try to explain the decision to pay £49 million and offer this 20-year-old a £180,000 a week salary.

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1. Raheem’s future will look bright to Manchester City

Most of us have an optimism bias. That is a tendency to look positively to the future and to assume positive trends continue. Raheem last year produced 75 chances in 35 games. When Ronaldo reached 20, he created 49 chances in 33 games and Messi achieved 40 in 28. A Sterling that continues to develop in a better team (sorry Liverpool fans) would be a regular game-changing player.

2. English Premiership players represent a more attractive choice.

Rising stars such as Atletico Madrid’s Antoine Griezmann (who score 25 goals last season) have the disadvantage of not being English or already in the Premiership. Raheem is a more visible and salient choice. Crucially he can also contribute to compliance with any future FA rules mandating a proportion of homegrown players. Greg Dyke and the FA in pushing for a homegrown quota have inadvertently created a choice architecture that favours Sterling and (given the scarcity of his talents) increased his price.

3.  Losing out to other title challengers will hurt City.

Another tendency most of us share is loss aversion. Put simply a loss of something we own will hurt more than a missed opportunity to gain the same value. The arrival of Sterling at Chelsea, Manchester United or Arsenal would have resulted in a loss of competitiveness for City and a reduced chance of Premiership and Champions League success. Not buying him was more than a missed opportunity. It involved a loss that would have hurt.

4. £49 million today is a relatively small amount of money.

Behavioural Economics reminds us that value is relative and not absolute. Furthermore it will change depending on context and time. £49 million today is a relatively small price compared to 2-3 years ago.  The value of broadcast rights for Premiership games will increase next year to more than £5 billion.  This is a 70 per cent increase compared to that collected for 2013-16. This growth in revenues frames player purchase decisions. It will both inflate transfer fees and make UEFA Fair Play fines more affordable.

So, with the lens of Behavioural Economics a £49 million purchase decision becomes easier to understand. With this ‘behavioural insight’ into what is driving a decision we are also better placed to influence change.  That is if we want to, of course.

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