Lessons in Economics from the IPL auction

In simple English, there isn’t enough going around for everybody. Now, take the case of the men’s Indian Premier League (IPL), the world’s most famous Twenty-20 (T20) cricket league, usually played from late March to late May every year. There are 10 teams that play the tournament. They have a certain amount of money which they can use to buy players in auctions and these players then play for the team. The amount of money that teams can use to buy players is limited. The same is true about the number of players who are skilled enough to be picked up by teams.

So, there is a scarcity of money and there is a scarcity of players. In this scenario, the teams need to allocate money carefully to buy players they think can help them win the tournament.

Typically, every firm makes similar decisions at different points of time. Companies decide whether to enter or not enter a particular business. They decide to allocate a certain amount of money to enter a certain business. Then they decide to spend that money in different ways towards different aspects of the business, in order to first get it going and then to keep it running. They also need to decide who to recruit—top management, middle management and foot soldiers—who can then run the business, hopefully successfully. Over a period of time, who to fire and who to retain, also becomes an important decision. Each of these decisions stems from scarcity of resources and is an allocation decision because money and people with adequate skills are usually both scarce.

Hence, money needs to be properly spent and the right kind of employees and other business partners need to be recruited in the hope of running a profitable business.

Nonetheless, when businesses make such decisions, they typically tend to do so behind closed doors. How the entire dynamic plays out isn’t visible in the public domain. The same cannot be said about the men’s IPL. Every year, teams buy players in a public auction, which happens a few months before the IPL is played. This auction is broadcast on TV and majorly covered across digital, print and TV media. In that sense, there is more information available on how different teams go about spending a limited amount of money while buying players, in comparison to businesses making similar allocation decisions behind closed doors.

In fact, the most recent auction happened on 19 December, and teams spent big money buying both domestic and international players. Indeed, the way they went about it and the amount of money they spent, offers us broad lessons on the subject of economics. In this piece we will look at these lessons.

Information

It is said that information is at the heart of economic decision making. Take the case of Mitchell Starc—the Australian fast bowler, who was the most expensive buy of the tournament. Starc was bought by the Kolkata Knight Riders for a whopping ₹24.75 crore. What explains this? First, Starc is a great T20 bowler, who has taken 170 wickets in the 121 T20 appearances at an average of 19.5 per wicket and an economy rate of 7.5 runs per over. Second, he will be playing IPL after eight years, bringing a certain novelty to the tournament and the team that he will play for. Also, his 121 T20 appearances aren’t much given that he played his first T20 match in December 2009. So, he isn’t really jaded playing T20 cricket. Or as the film writer Salim Khan once said, “You get paid for saying no”.

The trouble is every team had this information on him and more. Which is why they went hard for him. Delhi Capitals, Mumbai Indians, Kolkata Knight Riders and Gujarat Titans, all bid for him, until Knight Riders finally got him.

What does this tell us? More than information being at the heart of economic decision making, economic decisions impart information. Like in this case, four teams wanted Starc as a part of their plan. They really believe he can be a gamechanger.

Let’s now take the case of Pat Cummins, the captain of Australia’s men’s team, who was bought for ₹20.5 crore by Sunrisers Hyderabad. Cummins has played 128 T20 matches and taken 143 wickets at an average of 26.7 per wicket and an economy rate of nearly 8 runs per over. These figures tell us that Cummins is a decent T20 bowler but nowhere near the calibre of Starc in this format of the game. So, what explains the high price he was sold at? He has had a particularly successful year captaining the Australian men’s cricket team which won both the 50-overs ODI World Cup and the World Test Championship. So, teams vying for him were basically looking at him to captain the team and were willing to pay a high price.

Potential

This auction, like several other auctions over the years, saw teams paying top dollar for relatively unknown players. Chennai Super Kings (CSK) paid ₹8.4 crore for Uttar Pradesh batsman Sameer Rizvi. He is being called the right-handed Suresh Raina—a left handed batsman who performed superbly for CSK in the past. Then Gujarat Titans paid ₹3.6 crore for Robin Minz—aka Jharkhand’s Chris Gayle. The 21-year old wicket keeper batsman is yet to play for his state. Another Jharkhand player, Kumar Kushagra, got picked up by Delhi Capitals for ₹7.2 crore. Shubham Dubey got picked up by Rajasthan Royals for ₹5.8 crore. Spencer Johnson, a left-handed Australian fast bowler, was picked up for ₹10 crore by Gujarat Titans.

This is not the first time teams are paying such huge amounts for relatively raw talent. As Martin Wolf writes in a different context in The Crisis of Democratic Capitalism, economic decision making encourages “independent trial and error in an environment of fundamental uncertainty”. In that sense, teams have paid as much as they did primarily for the potential they see in these players. Of course, some recent performances would also have been taken into account.

But paying for potential still remains a process of trial and error. Teams have paid a lot of money for potential in the past and burnt their fingers in the process. Take the case of Pawan Negi. Delhi Daredevils (now Delhi Capitals) bought him for ₹8.5 crore before the 2016 season. Negi has a good overall T20 record as a left-arm spin bowler, but his performances in the IPL weren’t special except in 2017 when he took 16 wickets in 12 matches. Or take the case of Murugan Ashwin, who was bought for ₹4.5 crore by Rising Pune Supergiant (a team that no longer exists) before the 2016 season. His performances, like that of Negi, weren’t really great. KC Cariappa, deemed to be a mystery spinner, who was bought for ₹2.4 crore by Kolkata Knight Riders in the 2015 auction, is another example of the same.

Of course, there are success stories like Jaspreet Bumrah, Hardik Pandya, Varun Chakravarthy and quite a few others, who were relatively unknown players before playing the IPL. Trial and error can work both ways. In that sense, IPL teams betting on newer players for their potential, is like venture capitalists investing in startups, which at the time of investment do not have much of a track record but seem to have a lot of potential. Of course, that potential may not always come through, leading to IPL teams, like venture capitalists, burning their fingers.

The Winner’s curse

IPL has two kinds of auctions. The mega auction, which happens every three years and the mini auction, which happens in between. Regular watchers of the IPL auction believe that in the case of mini auctions, teams have more money available vis-à-vis the availability of skilled players who they would like to buy, allowing them to splurge more money while going after players that they want.

This explains the reason behind players like Starc and Cummins being sold at the kind of price that they did. Or if we were to put it in terms of economics, too much money chasing too few goods tends to bid up the prices. Did someone say inflation?

In fact, other than too much money chasing too few goods, there is another dynamic that tends to bid up prices in an auction. The economists call it the winner’s curse. As Richard Thaler writes in Misbehaving—The Making of Behavioural Economics: “When many bidders compete for the same object, the winner of the auction is often the bidder who most overvalues the object being sold.” The auction dynamic essentially ensures that teams end up overpaying for certain players.

This has happened in the IPL quite a few times in the past. Take the case of Yuvraj Singh. The left-handed batting all-rounder was bought for ₹16 crore in 2015 and ₹14 crore in 2014, respectively. He did not deliver much bang for the buck. In 2015, his batting average was just 19 per innings at a strike rate of 118. Or take the case of Charles Morris, a bowling allrounder from South Africa. In the auction before the 2021 IPL, after a fierce bidding war, Morris was bought by Rajasthan Royals for a whopping ₹16.25 crore, the highest amount ever, at that point of time. He played 11 matches in the season, claiming 15 wickets at an average of 25 per wicket and an economy rate of 9.2 per over. His batting was nothing to write home about. An average performance to say the least, which was probably not worth the big bucks.

As Thaler writes: “When a team falls in love with a certain player they are just sure that every other team shares their view. They try to jump to the head of the line before any other team steals that guy.”

Of course, the winner’s curse becomes clear only post the tournament or during the course of it, when a player does not perform well. So, will Starc and Cummins be worth the price teams have paid for them this year? That only time will tell.

Recency effect

The recent performances of players are more in the picture than their overall records. Take the case of Jharkhand’s wicketkeeper batsman Kumar Kushagra. His T20 record is very average. In 11 matches, he has scored runs at an average of 15.6 per innings and a strike rate of 118 for every 100 balls. That’s a poor record. Nonetheless, what attracted attention of the cricket scouts was an unbeaten 36-ball 67 runs that Kushagra scored in November against Maharashtra helping his team chase a score of 355 runs, in the 50-over Vijay Hazare trophy. The same stands true for Cummins as well, with teams going after him for Australia’s recent wins. Or take the case of Sameer Rizvi. He averages close to 50 in the 11 T20 appearances he has made for Uttar Pradesh and he hit 18 sixes in the Syed Mushtaq Ali Trophy, the domestic T20 tournament organized by the Board of Control for Cricket in India. As the Sportstar put it, he hit one six for every 11 balls he faced.

In a way, the focus on recent performances make sense, given that teams expect the players to carry on with the form that they are in, when they play IPL from March to May.

So, these are the lessons in economics that one can draw from the IPL auction that happened in December. And there is a final lesson, which we can call the Rinku Singh lesson, or as economists would put it, economic decision making doesn’t always lead to egalitarian outcomes. Singh has been in the form of his life, even hitting five sixes in five balls, to help his team Kolkata Knight Riders win a game in last year’s edition of the IPL. He was bought by the Knight Riders for ₹55 lakh before the 2023 tournament. Of course, the irony is that Yash Dayal, the bowler Singh hit five sixes, was bought for ₹5 crore by Royal Challengers Bangalore. Who said life is fair?

Vivek Kaul is the author of Bad Money.