After erstwhile Flames GM Darryl Sutter lost his mind in 2009, I referenced the book Sway by Ori and Rom Brafman to explain his descent into irrationality. The general take away is that humans have a strong bias towards avoiding loss and will often behave in less than rational ways as a result. I suspect a similar mechanism is at play the City of Glendale and the decision to commit yet another $25 million dollars to the Phoenix Coyotes next year.

The authors of the book provide a number of examples of this particular bias, including economic studies that show how assymetrical the response to perceived loss is. For instance:

Professor Daniel Putler…carefully tracked every aspect of egg sales in southern California (for over a year)…Turns out, when it comes to price increases, egg buyers are a sensitive bunch. If you reduce the price of eggs, consumers buy a little more. But when the price of eggs rises, they cut back their consumption by two and a half times…[the] feeling of dread over a price increase is disproportionate…to the satisfaction we feel when we get a good deal.

Paying for eggs is one thing. As is trading for the wrong players. But spending millions and millions of dollars on a perpetually money-losing boondoggle like the Phoenix Coyotes is another. However, as Brafman and Brafman note: “the more meaningful the potential loss, the more loss averse we become. In other words, the more there is on the line, the easier it is to get swept up in an irrational decision.”

The tale of Glendale Arizona and the arena is an object lesson of why governments subsidizing private sports teams with expensive arena deals is almost always a bad idea. Located about 12 miles outside of downtown Phoenix, the rink was constructed in 2003 with a pricetag of about $180 million. The city of Glendale issued revenue bonds backed by general sales tax at the time to fund the arena’s construction. The rink was part of a larger real estate play dubbed “The Westgate City Center entertainment and retail complex”, a project that was to “revitalize and reinvigorate” the area with the Coyotes and being the “anchor” for the area.

The scheme backfired. The Coyotes struggled with poor management, strict roster budgets and perpetually disappointing crowds. The franchise filed for bankruptcy in 2009 amidst fights amongst the teams ownership and Glendale politicians. The fortunes of the club on the ice have ironically improved under the guidance of Dave Tippett and Don Maloney since that time, but the organization continues to bleed red ink despite garnering winning records and a pair of post-season appearances.

In short, the business plan for Glendale and the future success of the Phoenix Coyotes appears to mirror that of the Underpants Gnomes:

1.) Spend tax payer money

2.) Ensure anchor tenant

3.) ?

4.) Profit!

Never mind that the Coyotes have never made money in the desert. Never mind that Glendale apparently has to resort to bribing exceedingly rich men to “own” the team. And never mind that the town is now poised to spend some $50 million in tax payer dollars over a two-year span to cover the club’s operating losses. If the team sticks around, then everything will somehow be okay!

Thanks to the tendency to perceive loss as something to avoid at all costs, the objective of keeping the Coyotes in Glendale has becoming an all consuming goal for the town and it’s mayor Elaine Scruggs (who has been one of the key figures in this fiasco since the beginning). Glendale has certainly invested a lot of time and money in trying to retain the Coyotes, but there’s little evidence their investment will bear fruit, whatever the outcome, since the market doesn’t appear able to support an NHL team (with apologies to those who are Phoenix Coyotes fans). There’s simply no compelling evidence that the Coyotes will ever be able to garner a meaningful profit in their current location. Meaning each dollar spent to keep the Coyotes around is a good bet to be a dollar lost. The situation is therefore a bottomless money hole.

The potential loss of the Coyotes obviously looms large in the minds of Glendale officials. The city is now into the team for about $200+ million and the Coyotes departure would kill any hope of eventually leveraging the rink to pay back the debt or invigorate the surrounding area. This is the insidiousness of the sunk-cost fallacy: future behavior is guided more by the need to avoid losses/waste rather than a view to maximizing efficiency. Glendale continues to throw good money after bad, not because anyone seriously believes that the Coyotes are a good investment, but because Scruggs and company cannot bear the thought of losing the club due to the city’s prior financial commitments.

The final outcome of this episode is yet to be decided, but it’s almost certain it won’t be a happy ending for Glendale whatever happens. The real question at this point is: just how deep a hole is the city willing to dig?