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Grand Prizes Might Help Induce Sports Hot Streaks

That’s the result of a study, titled ‘Contests, Grand Prizes and the Hot Hand,’ by economists at North Carolina State University. It was posted January 7, 2009, in the Journal of Sports Economics’s OnlineFirst directory of forthcoming articles and will appear in print later this year.

The study was co-authored by Todd McFall, who wrote the paper for his doctoral dissertation economics while in the NC State Graduate Economics Program, along with Charles Knoeber, professor of economics in the NC State College of Management’s Department of Economics, and Walter Thurman, William Neal Reynolds Professor of Agricultural and Resource Economics. Thurman has a joint appointment in the College of Management’s Department of Economics and in the College of Agriculture and Life Sciences’ Department of Agricultural and Resource Economics. McFall is now with Welch Consulting in Texas.

In this study, the researchers examined the Professional Golfers Association (PGA) Tour both before and after 1987 and the creation of its season-ending financial carrot, the Tour Championship. Participation in the big payday Tour Championship is limited to the top 30 players on the PGA money list; that is, the 30 players who have won the most money in that season’s tournaments. All 30 players invited to the Tour Championship are guaranteed to earn money. During the remainder of the 45-event PGA Tour season, about half the players earn money in each tournament, based solely on performance.

The study showed that players who perform well early in the tour season have an incentive to continue to perform at a high level into the middle part of the season to secure a top-30 finish and an invitation to the Tour Championship. Once a top-30 money list position is in hand, players can be tempted to slack off a bit, causing their scores to increase – which in golf is a bad thing.

Conversely, players who are near or slightly below the top 30 on the money list must work extremely hard at the end of the season as they vie for a spot in the Tour Championship. These players fighting for a top-30 ranking exert more effort and play better down the stretch.

The study showed that during Tour Championship years, the top-ranked player was 0.13 strokes better per round than the 30th-ranked player about a quarter of the way through the PGA Tour season. But with just one tournament remaining in the season, the top-ranked player was 0.56 strokes worse per round than the 30th-ranked player.

The researchers found no similar relationship in the years before the birth of the Tour Championship in 1987 because incentives in those seasons were constant. That is, the only incentives were those during each individual tournament.

“Using a lucrative grand prize is a way to link together a series of tournaments,” McFall said. “Most research on the subject of hot streaks focuses on the psychological perspective. This study suggests that a large, season-ending financial incentive that links together competitions might be an economic explanation for hot streaks.”

Abstract of the paper

Awarding a grand prize to the player who wins most often in a series of contests links the contests together and makes incentives in the current contest depend on past performance. A lucky player who wins early faces relatively stronger economic incentives to exert effort because of his early success. As a consequence, early winners are more likely to keep winning through the middle of the series. That is, a grand prize generates what looks like a hot hand. Indeed, this argument about economic incentives may help to rationalize the inconsistent evidence of a hot hand in sporting events. This article develops this argument and assesses it empirically using data from the Professional Golfers Association Tour, before and after a grand prize, the season-ending Tour Championship, was introduced.

Contacts

Todd McFall
Charles Knoeber
Walter Thurman