Originally posted on April 7, 2010.
In our chapter on Getting Incentives Right we wrote:
A tournament removes risks from outside factors that are common to all the players but it adds another type of risk called ability risk. Imagine that you had to compete in a golf game against Tiger Woods. Would you put in more effort if you were paid based on the number of strokes or if you were paid based on who wins the game? The probability that you could beat Tiger Woods at golf is so low that if all you cared about was money, it would make sense to give up right away –— why exert effort in a hopeless cause? Of course, for the same reason, Tiger Woods won’t much need to try hard either!
An excellent article in the WSJ reports on academic research that shows that the effect of “ability risk” is very real.
According to a paper by Jennifer Brown, an applied macroeconomist at the Kellogg School of Management at Northwestern University, Mr. Woods is such a dominating golfer that his presence in a tournament can make everyone else play significantly worse. Because his competitors expect him to win, they end up losing; success becomes a self-fulfilling prophecy.
Ms. Brown argues that the superstar effect is not just relevant on the golf course. Instead, she suggests that the presence of superstars can be “de-motivating” in a wide variety of competitions, from the sales office to the law firm. “Most people assume that competing against an elite performer makes everyone else step up their game and perform better,” Ms. Brown says. “But the Tiger Woods data demonstrate that the opposite can also occur. It doesn’t matter if the superstar is an athlete or a corporate vice president. After all, why should we invest a lot of energy in a tournament that we’re probably going to lose?”
…Whenever Mr. Woods entered a tournament, every other golfer took, on average, 0.8 more strokes. This effect was even observable in the first round, with the presence of Mr. Woods leading to an additional 0.3 strokes among all golfers over the initial 18 holes. While this might sound like an insignificant difference, the average margin between first and second place in PGA Tour events is frequently just a single stroke.
Tournaments work best when the players are of similar ability because this minimizes ability risk. Another way of countering ability risk is to handicap the stronger players. If we added a stroke or two to Tiger Woods’ score, for example, this would encourage all the other players not to give up and if we don’t set the handicap too high it can also encourage Tiger to work harder!