Financial Fumbles

As football season starts up again this fall, it’s easy to become envious of football players and their multimillion dollar contracts. But don’t let the mansions and expensive cars fool you: they’re just as likely to go bankrupt as the rest of us, a recent Caltech study says.

In economics, there is a well-known model called the lifecycle hypothesis that describes how people earn, spend, and save money over the course of their lifetimes. The average person’s financial profile generally fits this model: when you’re young, you don’t earn a lot, but you need to beef up your savings for retirement; middle age is when you begin to hit your top earning potential; and when you’re retired, your income is reduced, and you need to start relying on savings.

Economist Colin Camerer and former graduate student Kyle Carlson (PhD ’15) wanted to see if this model held strong even in unusual cases—such as with NFL players who can earn millions of dollars right after college but then be forced into retirement by injuries in their mid-20s.

They collected NFL players’ publicly available football income data and tracked actual bankruptcies of those players. What they found was that although optimal models say that NFL players should theoretically earn enough money in a few years to last them through retirement, in actuality, the players go bankrupt at the same rate as the average person who earns much less. And a player’s career earnings and time in the league had no effect on this bankruptcy risk.

“We know that the hypothesis doesn’t work for these people, but we can’t really say why. There are a lot of ways in which the players are different from typical people,” Carlson says. For example, these athletes are earning large sums of money when they are very young and might be inexperienced in financial planning. Furthermore, their risk-taking behavior on the field may also result in riskier investment decisions in life. So while your favorite player may not fumble on the field, he might drop the ball when it comes to planning for his financial future. —JSC

 

One thought on “Financial Fumbles

  1. Thank you for this interesting post. Although I am qualified as an economist, I sometimes think how even those who are regarded as very successful and as high earners for a limited time, in the NFL as in any other lucrative sport, can encounter problems once they reach the end of their short careers. If as you say they often don’t behave ‘rationally’ according to the life-cycle hypothesis, the rest of us who earn much less can be more philosophical about comparing our success with such ‘stars’. If the latter don’t manage to adapt to a new life after retiring from competitive sport, they can have problems just like the rest of us, sometimes much worse, although how they deal with them can be a valuable learning experience. For me, the evidence you present is as relevant to the economics of high earners with short careers as it is to a philosophy of life.

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