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Business, Bankruptcy, and Beliefs: The Financial Demise of NBA Stars

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  • Henry, Ruby

    (University of Toulouse I)

Abstract

The financial troubles of professional athletes are an ongoing topic of intrigue. In general, the zealousness brought to private equity schemes are a common factor in observed financial insolvency. Considering the behavioral attribute of self-confidence I propose a simple model which explains entrepreneurial activity and adverse financial outcomes. The model implies that investment effort increases with self-confidence, while promoting financial solvency. Constructing a unique database of NBA players affords a singular opportunity to measure confidence directly from behavior, avoiding bias from self-reported surveys. In addition, I observe for-profit business ventures and use this data to test the model's implications for the outcomes of both entrepreneurial activity (investment effort) and bankruptcy. Without correcting for endogeneity it does appear that starting businesses causes bankruptcy. After using charitable foundations as an instrument, however, the data confirms the model's prediction – that investment effort is associated with financial solvency. That said, I also find that the effect of confidence on bankruptcy to be non-monotonic. Having some confidence decreases the probability of bankruptcy, but high levels increase this probability.

Suggested Citation

  • Henry, Ruby, 2013. "Business, Bankruptcy, and Beliefs: The Financial Demise of NBA Stars," IZA Discussion Papers 7238, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp7238
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    References listed on IDEAS

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    1. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
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    3. Brocas, Isabelle & Carrillo, Juan D, 1999. "Entry Mistakes, Entrepreneurial Boldness and Optimism," CEPR Discussion Papers 2213, C.E.P.R. Discussion Papers.
    4. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    5. White, M.J., 1998. "Why It Pays to File for Bankruptcy: A Critical Look at Incentives Under U.S. Bankruptcy Laws and A Proposal for Change," Papers 98-02, Michigan - Center for Research on Economic & Social Theory.
    6. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-535, June.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Overconfident NBA players are lead to a financial demise
      by Economic Logician in Economic Logic on 2013-04-01 19:21:00
    2. The sporting life, & taxes
      by chris in Stumbling and Mumbling on 2017-04-10 17:58:47

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    More about this item

    Keywords

    self-confidence; bankruptcy; athletes; entrepreneurs influence; entrepreneurship;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • I20 - Health, Education, and Welfare - - Education - - - General
    • J13 - Labor and Demographic Economics - - Demographic Economics - - - Fertility; Family Planning; Child Care; Children; Youth

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