Money and PEDs

Usain Bolt destroying both the 100m and 200m world records he set back in 2008 at the summer Olympics has been a pretty big deal that last few days.  Not only did he break the previous records, but he also dropped it by an astonishing 0.11 seconds off both the 100m and 200m records!  So, after everything we have learned about baseball,  cycling (and pretty much every other pro sport), the question of steroids is bound to arise.

There has been enough talk about the moral and health reasons for not doing steroids so I am going to take a different look at the problem.  I want to know what the economics behind a professional athlete doing steroids really  is.  It’s an interesting question because if you get caught then your career as a pro athlete might be over, but even if that occurs, there is a good chance the athlete could have made enough money during his the steroid years to be set for the rest of his life.  Consider this: Financially, would it be better to take steroids, make a ton of money then get caught and have a shorter career, or to have been a mediocre athlete who is just getting by for a long period of time.  The steroid athlete will be labeled as a cheater for the rest of their life, but I am guessing that if the athlete is willing to take that chance then the financial upside could be enormous.

First lets make a couple of assumptions.

1. We use an 8% return on all cash that has been saved (this is the expected return minus inflation)
2. Assume that a highly paid athlete might spend $150,000 yearly (post tax) – this number is probably very low compared to what athletes actually spend, but I wanted to use a spending number in which was reasonably sustainable in the long term
3. The tax rate is 40%
4. Real wages adjust exactly with inflation so spending power remains constant
5. The interest rate on borrowing is 5%
6. Assume that the Non-PED athlete makes 1/2 of what the PED athlete makes during their primes.  After 5 years the PED user is caught and makes no more money from racing or sponsors.  The non-PED athlete continues to earn money into his 30′s but the amount decreases because he is not as fast.  Even though this athlete stops racing in his mid 30′s he still earns some income from sponsorships until he is 40.

One other point:  I have chosen to think about this model by looking at the yearly cash flows rather than looking at the NPV or other financial metric to compare the steroid situation to the clean option.  I have done this because it seems like the most relevant model to how people live. The key question is “when will I run out of money,” so building a yearly cash flow model seemed like the most relevant way to examine that question.

Results: I used the inputs above plus the cash flows shown in the first chart.  The red bars are for the elite athlete that takes PEDs but is caught after 5 years. The blue line represents the earnings of an athlete who is near the top of his sport (track), but is not world record breaking.  His career continues into his mid 30s.

Its a little hard to see on this chart, but what we are showing is that if each athlete is spending $150k per year (post tax) then even though the PED athlete earned no income after the age of 26 he is still better off than the clean athlete who never took PEDs.  The PED athlete runs out of cash around age 60, but the non-PED guy runs out around age 45.

A few more notes:

• This analysis does not mean that I condone cheating or taking Steroids.  The analysis was performed simply to show that in some cases there may be a long-term financial benefit to taking steroids.
• Usain Bolt was just the example that got me thinking about this question, but the situation applies to all athletes.  This model could just as easily have been used to describe the financial benefit McGuire, Sosa, A-Rod or any other athlete receives from boosted performance (and compensation) due to PEDs.
• This model was also originally built to investigate the financial differences between professional athletes (with high compensation over a very short time frame) vs. a regular person with regular payments over a lifetime.  The thought at the time was to figure out what a pro athletes finances might look like if their spending corresponded to a regular person rather than an extravagant lifestyle.  Would a pro athlete making hundreds of thousands of dollars over a 3 year career be able to survive without any further income (beyond investments) if his expenses matched those of a regular person?  [I'll probably have a follow-up post on this sometime later making minor modifications to my model]