The psychology and economics of the UFC bonus system

Sunday, July 21, 2013

“Fighters have to be optimists.”
-Greg Jackson

MMAJunkie’s Ben Fowlkes recently wrote a compelling piece on the economics and psychology of the UFC perfomance bonus system.

In response to complaints about fighter pay, UFC president Dana White floated the idea of abolishing the performance bonus system and instead distributing it among the fighters.

As you would expect, the performance bonuses or best fight, submission, and KO of the night most often go to the better fighter fighters – those that appear on the main card, rather than the prelims. For example, a fighter on the main card statistically has a 14.7% chance of winning Fight of the Night, while a fighter on the prelim card has a 3.2% chance. No fighter on the 12th spot on a card, typically the first fight of the night, has ever won Fight of the Night.

However, White said that when he surveyed fightters, they wanted the performance bonuses and discretionary pay to stay as is. Fowlkes found similar opinions when he interviewed fighters.

That does not make economic sense. An extra $200,000 (50k x 4) spread evenly to lower-level fighters would be about 15k extra for each undercard fighter on a typical 12-fight card. Given that the 200k naturally spreads unevenly towards the main event fighters, it would be to undercard fighters’ advantage to scrap the old system.

So why do fighters want a system that is not to their benefit? Fowlkes interviewed professor of Economics at Towson University in Baltimore Seth Gitter, who suggested the answer lies in the psychology that motivates someone to fight in the first place – fighters can be risk-loving.

“Most economic theory assumes that most people want to avoid risk,” said Gitter. “That’s why we buy insurance. But in some cases people are risk-loving.”

That aspect of fighter compensation, Gitter said, brings to mind the economic concept known as “tournament theory.”

“The idea is that in many situations most people receive really small wages with a small chance of big wages,” Gitter said.

Those wages are determined not so much according to actual value, but rather on relative value among the individuals. That’s why winning a fight usually pays twice as well as losing it, and why the champion usual makes many times more than the challenger. Financially, being No. 1 in MMA isn’t an incremental improvement on being No. 2 – it’s a colossal one.

Obviously, it’s not just wins and losses that factor into an MMA fighter’s pay. There’s also a lot to be said for popularity, as well as for differences in weight classes.

Still, tournament theory might help explain why fighters are often content to compete for very little in the hopes of one day hitting it big. It also might be a very savvy way of doing business, from the UFC’s perspective.

“Economic theory developed under tournament theory suggests the most effort will be put into production when there is a big difference between winning and losing payouts,” Gitter said. “I think the prizes provide exactly the incentive an economist would recommend.”

In order to make it work, all you need are people willing to take the risk. You need people who either aren’t calculating the odds that the bonus system will work in their favor, or else people who so overestimate their own abilities that they assume they’ll be one of the lucky ones who ends up being the exception rather than the rule. In other words, you need the kind of people who want to become pro fighters in the first place.

Read entire article…