When New England Patriots quarterback Tom Brady was spotted by paparazzi wearing a walking cast on his foot, a shock wave rumbled through Patriots nation. The frightful images also sent bookmakers scurrying to rework betting lines. A potential injury to the seemingly unstoppable New England quarterback had odds makers reworking the Super Bowl point spread, knocking 2 points off of the original calculation and making the Patriots a 12-point favorite over the New York Giants.
The Brady boot incident is an example of the efficient-markets hypothesis, says James Mahar, an assistant professor of finance at St. Bonaventure University, near Buffalo, New York. An efficient market adjusts rapidly to the arrival of new information, which means that current prices (or the line on the Super Bowl, in this case) will reflect all available information. From a theoretical standpoint, the revelation that Brady’s ankle may be weak when he takes the field on Super Bowl Sunday is an example of the so-called semi-strong form laid out in the theory. That is, a semi-strong form asserts that current prices reflect all new information. Meanwhile, a weak form factors into the price past market-based information, and a strong form includes insider information.
Mahar and Rodney Paul, an associate professor of finance at St. Bonaventure who teaches a graduate course called “Economics and Finance in Sports,” have come up with a handbook to teach undergraduate and MBA finance courses using football analogies. “Using Football to Teach Finance,” which was released in 2003, makes a connection between football, the leading spectator sport in the United States, and basic finance theories and practices. “Even though baseball is talked about as being America’s pastime, this generation of students has a greater interest in football, on both the professional and college levels,” Paul tells CFO.com.
The professors use the teaching technique to draw students into the often-abstract world of finance by using concrete sports examples. While the handbook won’t have faculty members ditching textbooks, it is a useful tool to help students make real-world connections to finance, adds Paul.
For example, one of the toughest concepts to explain to new finance majors is the time value of money, notes Mahar. And failure to grasp this “crucial topic” has caused many students to do poorly in the class, or drop out of the major entirely. To pique a student’s interest in present-value calculations, discount rates, and expected cash flows, the duo turns to player contracts.
Present-value calculations are based on the premise that money today can be invested to earn more in the future; or, a dollar today is worth more than a dollar tomorrow. Also, to estimate the present value of future cash flows, a discount rate must be applied, which is an interest rate that reflects a risk premium that the cash flow may not materialize in the future. Now add a pigskin to the equation.