Graph of the week: Correlation doesn't imply causality vol. 2

Or Which is more important in competitive sports, money or talent?

The Economist once again paired an interesting relationship which could be suspect to the most obvious mistake in social sciences - interpreting correlation as potential causality. As I've pointed out in my earlier text on a similar topic linking wine consumption and academic performance, just because we inferred a pattern in the data doesn't mean that there is an actual causal link between the two observed variables. 

This time they look at the English Barclays Premier League (BPL) and compare club performance in the league (points) for the past 20 years with the money spent on player wages as a percentage of the season's median. Basically the question is how much does money matter? 

Source: The Economist

According to the graph above it seems that it matters a lot. The more money the club spent on player wages, the higher, on average, the points they gain by the end of the season and hence the higher the likelihood of them lifting the trophy when the season ends. When one looks at all the money spent by clubs on their players one can't help at agreeing with this obvious conclusion. Just last year the BPL wage bill was £1.7 bn, or close to 75% of club revenues. No company pays so much to its employees. But on the other hand it's all justified, as top-class players who get paid astronomic wages attract the most people to the stadiums who are prepared to pay a big price just to see these players in action. No wonder some fans are getting more and more aggravated at the poor performance of their clubs' biggest stars (just think of Man Utd this season - at least those who watch the BPL). 

Anyway by their calculation wage spending explains around 55% of the total variation in club performance. Which basically means that money matters but it's far from being the most important factor. As the authors of the text point out themselves good managers also matter, and to a large extent: 

"Sir Alex Ferguson, who retired as Manchester United’s manager last year, was remarkable in his outperformance: over 19 seasons his teams gained 15 points more on average than would have been expected given the amount the club spent on wages. These margins matter. Had he been an average manager, he would have won just one title. Instead, he won eleven."

I would say that good managers are actually crucial. Just look at any sports club when a good manager replaced a bad one (or vice versa) and had the same team at their disposal - the good manager outperforms the bad one often with the exact same squad (that's a good treatment effect). It's all about tactics and a winning mentality. Money can help retain a powerful presence on the transfer market, but it's hardly the key factor behind success. If this were to be true, then super rich clubs would just blow their competition away, but they don't. If this were true then we would never have an underdog story in sports. But we always do. 

I'll stick to football (the European one) as this is what I know best, but similar examples can surely be found in all sports. In the BPL, this season Liverpool has been outstanding with no one giving them a chance even to reach the top 5 (they came 7th last season and had a very poor last 5 seasons), but in the end they have only themselves to blame for not winning the league. Their wage budget however was the lowest among the top 4 (and Man Utd who came in 7th). In Germany Borussia Dortmund was on the brink of bankruptcy and battling for relegation only 4 years before they won two titles in a row and reached a Champions League final. In 2004 Jose Mourinho defeated all the richer clubs to win the Champions League with Porto. This season Atletico Madrid has a chance of gaining a double: the La Liga (domestic league) and the Champions League, punching above both super-rich Real Madrid and Barcelona. The underdog unsettled the duopoly of the Spanish Primera. 

And don't we all love a good underdog story in sports? Any sports. When a team or an individual outperforms his/her/its opponents not by amount of money they splash, but by the spirit and passion they posses about the game. That's after all what sports is all about - competition. It is a market game where many compete, some with better resources, some with fewer, but everyone is given a fair chance to put up a fight. And very often we can see underdogs unsettling the richer and "more powerful" teams. On the field, each team starts with the exact same position, every game. No one loses in advance.

The above correlation perhaps can point to an interesting observation but it's far from conclusive that money wins you titles. It surely can help but it's not a guarantee of success. Take a look at any football club when they were bought by an eccentric super-rich owner - not before they got the right manager and the right coaching team to support the manager did they enjoy some success. This too can of course be attributed to the money the owner was willing to pay for getting a great manager, but it only means that it takes more than money to build a winning team. After all not all rich owners can attract a good managerial name to their newly acquired toy. 

In addition the world's richest football club Real Madrid have spent astronomical amounts of money on buying players as well as their wages (they broke the world transfer record twice) only to win 3 trophies (1 Liga and 2 Cups) in the past 6 years (however this year they have a chance of winning the Champions League - which would make it all worth while, wouldn't it?). Also Manchester United, the second richest football club in the world, and yet this season, the first in 24 years without the guidance of Alex Ferguson, was dreadful, despite them awarding their best player an enormous pay rise. Managers and their surroundings (support they have from chairmen, the facilities they enjoy and the team of expert coaches they have) matter.

Or to put it into economic terms; institutions matter! It's just like the story with rich and poor nations. People like to say that today's rich nations are rich simply because they were rich to begin with (they had a colonial heritage). But having a colonial heritage or being rich in natural resources has nothing to do with being a wealthy country today - the relative strength of a country's institutions provides a much more precise answer as to why some nations today are rich while others are poor.