How to value a player on Football Index

One of the trickiest things to figure out when starting as a FI trader is why a player is a certain value and whether that price is justified or not. Clearly value doesn’t directly correlate to the real world or a £10m player at a low ranking French side like Teji Savanier wouldn’t be almost three times as valuable as a world-class player like N’Golo Kante.

In this piece, I’ll start by discussing how to assess the rational value of a player and then I’ll go on to talk about how market sentiment creates predictable irrationality. You need to understand rational value so as not to get caught up in bubbles but you also need to understand why some players will be consistently irrationally priced so as not to miss out on opportunities.

Rational value

Ultimately pricing in FI is driven by the potential to win dividends. If we had complete information about a player’s career then their value would equal the remaining dividends they’re going to win in their career plus a bit of interest to cover the opportunity cost of the investment. Given we don’t have perfect information the best way to estimate this is to look at historic data on players and apply it forward making adjustments for likely changes in winning potential (new team; a likely increase in transfer speculation etc…) E.g. if you think Neymar will win similar amounts of divs to last season every year (£1.18) and will play for another seven years then his current price is about right. If you think he might win more because he’ll go to Barca then he’s value. If you think less because he’s so injury prone then he’s overpriced.

(NB: applying this method produces one massive outlier: Paul Pogba won £2.28 last year. If you think he’ll play another 7 years or so his price should be £15 or so! It is way lower simply because so much of his value is tied up with being at Manchester United and it’s unclear how long he’ll stay there.)

IPDs add a complicating factor as for cheaper attacking players (and keepers) as there is an additional 30 day value for whoever is holding which is also reflected in the sell on price. One way to think about the IPD value-add is the total potential career goals and assists minus monthly 2% commission. Let’s say you think Luiz Suarez is going to play for two more years and will get 50 goals and assists in that time. That would add 50p to his value but to hold him for IPD through this whole period at his current price would cost 36p in commission. So his additional IPD value, above his PB/MB value, is 14p. However, because IPD is not consistently distributed during the year his value will fluctuate – increasing when there’s a busy run of games and decreasing during slow periods. This doesn’t affect more expensive players as the commission will always be higher than any potential IPD earnings.

Age is another complicating factor. Clearly we can make a much better estimate of the likely career earnings of an older established player than a teenager who’s barely played any games yet. The dividend potential of a Mason Greenwood or Rhian Brewster is essentially unknown. They could go on to be the most successful English player in their generation. Or could end up at Luton Town in a few seasons. Greenwood could have a “real” value of 50p or £10. Pricing tends to go towards the higher end of the potential spectrum with such players because traders typically have a level of optimism bias towards promising young players, especially if they’ve come through the academy of a team the trader supports. It also means there’s more price volatility with younger, hyped players. Over time as the real potential of a player clarifies then the price will stabilise and move towards a level consistent with real dividend earning potential.

The final complicating factor is the future of the platform itself. Clearly user numbers are still growing pretty fast which means FI will need to find ways to create additional value for traders. Adam Cole and team are understandably cautious about PB/MB increases because they are a one-way ratchet. Once increased they can never be reduced because that would immediately cause a run on the market. Over the past few months they’ve been trying to find ways to increase short-term value while limiting their long-term exposure – first with media madness and now with PB on European Championship games. Eventually though it is likely they will make further permanent increases to PB. To an extent these are already priced in so most players are somewhat higher priced than they would be if we knew PB/MB would never increase.

Irrational Value

The above should hopefully give new traders some general rules of thumb about how to value players. But the market is not always rational. For a start most traders do not have access to historic data via IndexGain premium or other providers. Low information market tends to be more volatile and more prone to irrational behaviour than high information ones. In addition we all have predictable cognitive biases that drive our behaviour. Some types of irrational behaviour, particularly bubbles on certain trends or players, are very hard to predict in advance, but other types are more consistent. Understanding the ways in which the market is predictably irrational provides opportunities for successful trading.

Here’s a non-exhaustive list:

Optimism bias

I’ve already set out how players with high-potential tend to be somewhat overpriced due to optimism bias. Traders can see the path to Greenwood or Brewster becoming the next Ronaldo but forget about all the other great prospects who have fallen by the wayside over the years. Given this is predictable, though, it can still be worth investing in youth that seems rationally overpriced especially if you can see them reaching notable landmarks over the coming months (e.g. their first senior team appearance; first goal; first international call-up…) all of which may lead to further rises. Equally you will also see occasional hefty corrections on these players (such as the recent 10% drop on Greenwood and 20% drop on Brewster) if they overheat.

Loss aversion

This is the most powerful form of cognitive bias and no one is immune to it. Decades of experiments have shown us that for most people losses cause twice as much pain as the pleasure caused by an equivalent gain. This means traders will continue to irrationally hold players that have rationally dropped in the hope that something will happen and they’ll able to sell above the price they bought. Across the market this means players do not drop as much as they should on the basis of solid new information about performance. Take Sergio Ramos last season as an example. He rose a lot in the first few months of the season as he was now on penalties for Real Madrid following Ronaldo’s departure and under Lopetgeui his baseline PB was very high. However, once Lopetegui was fired his average scores dropped. His price, however, stayed well above rational levels for a long time as traders hoped something would turn up. Another example would be Alexis Sanchez at United, even after it became apparent his form was woeful. This is very handy for traders who are prepared to cut their losses as it often means you can do so at fairly little cost even after it’s become apparent you’ve made a mistake.

Discounting

This is another well-known bias whereby we overvalue short-term gains and undervalue larger long-term ones. People will typically prefer to receive a smaller financial gain this week than a significantly larger one in a year’s time (even after adjusting for inflation etc…) This means traders over-react to short term setbacks and under-react to long term potential gains. Injuries are a great example. A player who gets a bad injury which will lead to them missing two or three months will typically drop 10-20%, even though they can’t possibly be expected to earn 10-20% of their career dividends in the next 2-3 months (unless they’re in their last season or two). Equally players likely to get a first team chance due to an injury will often rise by a similar amount, even if there’s no way they could earn enough to justify such a rise over that period. Rational traders can take advantage of this short-termism – buying a good player, with plenty of their career left, after an injury drop is one of the easiest ways to make money on FI if you have a bit of patience.

Hopefully this has given new traders some ways to think about valuing players. In the next piece I’ll look at tricks and tips to counter your own cognitive biases.

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Sam Freedman
Written by Sam Freedman
Sam is the CEO of an international education charity and has previously worked in UK education and Government. He has always taken a strong interest in behavioural psychology which he looks to apply to FI in his spare time.
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