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Dennis Coates

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Dennis Coates and Brad R. Humphreys

This chapter reviews existing theoretical and empirical literature on the intercollegiate and professional sports industries, including professional and intercollegiate sports leagues and the fitness center/health club industry, from a behavioral economic perspective. Since firm and industry outputs, firm input choices and consumer decisions in sports are readily observable and standard economic models of rational choice generate clear predictions about what firms and consumers should do, the sports industry is a natural industrial setting for behavioral economic research. The chapter covers behavioral biases in decisions made by teams and team managers, behavioral biases resulting from industry-wide policies in the sports industry like entry drafts, behavioral biases in decisions made by referees and biases in interpreting industry outcomes. It also examines behavioral biases in decisions made by customers in the industry, sports fans, and finally turns to the impact of behavioral biases on contracts and consumer choices in the fitness center/health club industry.

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Dennis Coates and Brad R. Humphreys

A growing body of research addresses the theoretical basis for the uncertainty of outcome hypothesis (UOH), in the context of alternative models of consumer choice under uncertainty, and assesses empirical evidence supporting the UOH, and an alternative explanation for observed variation in game-level attendance at sporting events, the presence of fans with reference-dependent preferences and loss aversion (RDP/LA). Humphreys and Zhou demonstrate that structural econometric tests of the UOH versus RDP/LA using game-level data will be influenced by an econometric identification problem. Consumers’ attendance decisions will, in general, be influenced by three parameters reflecting (1) preference for outcome uncertainty, (2) loss aversion, and (3) home-win preference. Structural econometric models identify these three parameters with only two variables: objective home-win probability and objective home-win probability squared. This identification problem may explain the lack of consensus in empirical tests of the UOH versus RDP/LA.