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Over the past month, one question seemed to be on everyone’s
mind at the economic conferences I attended in Europe: How did referees miss a
goal that England scored against Germany in their World Cup match?

Soccer reform wasn’t the stated focus of these conferences.

But thinking about how to improve the sport’s regulations comes
naturally to economists, especially after a few beers, because some of the same
principles should be applied to economic regulation.

The first is that the regulator – in this case, the referee – is
fallible. So the rules should make the regulator’s job as easy as possible.

Second, regulators can’t detect every irregularity, so the
emphasis has to be on getting the big stuff right. Finally, we want
performance, not regulators, to determine the outcome. The best regulators are
those we don’t notice.

In soccer, one head referee has to cover a “pitch” larger than
an American football field. He has three assistants who must stand on the
sideline. There is plenty of evidence beyond that missed English goal that
referees are indeed human. For example, referees call more fouls against the
visiting team, and against bigger players. So, what can be done?

ADD REFEREES Put at least one more ref on the field. (Basketball
has three referees on a much smaller court.) The idea is under consideration by
FIFA.

This is a no-brainer for the World Cup, which generates billions
of dollars in revenue, but in the world of financial regulation, adding
referees is costly. Governments will need to cut budgets, so we need to make
regulators more efficient, not more numerous.

ADD TECHNOLOGY Although instant replay showed that England’s
goal should have counted, FIFA officials have resisted using technology that
could help.

Many technological solutions, including embedding an electronic
chip in the ball, would make the determination of goal scoring faster and more
accurate.

Technology can help in other regulatory areas as well, and is a
good way to increase efficiency. For example, requiring banks to file their
compliance data electronically drastically reduces the time it takes to conduct
an audit.

INCREASE SCORING In the most recent tournament, the teams
together scored 2.27 goals per match, the second-lowest number in history. The
problem with low-scoring games is not just that they bore uncultured Americans
like me. Low scores magnify the importance of referees’ decisions. When a team
is awarded a penalty kick, it scores about 75 percent of the time, and that’s
very likely to affect the outcome of a low-scoring game.

In finance, a useful analogy is to increase the capital
requirements for banks. By requiring banks to have a bigger security blanket,
regulators themselves have greater margin for error.

REDEFINE ‘OFFSIDE’ The offside rule is now too hard to enforce.
When a player passes the ball downfield, no one on his team can have any part
of his body farther downfield than any defender, aside from the goalkeeper. The
linesman calling these violations runs along the sideline, keeping parallel
with the offensive player closest to being offside – all while watching the
ball.

This requires wide-angle vision that humans don’t possess. Short
of eliminating the rule, we might limit offside calls to players whose entire
body is ahead of the defenders. That should be easier to detect, and might lead
to more goals scored.

The general point is to make the judgment tasks of regulators
easier. The Securities and Exchange Commission had trouble assessing the
technical arguments that strongly suggested that Bernie Madoff was a crook, but
they could have easily had a rule requiring him to document his assets under
management.

RETHINK PENALTIES Another idea is to adjust the silly yellow/red
card penalty system. There are three levels of fouls in soccer, depending
partly on whether the action is “careless,” “reckless” or “using excessive
force.” It is asking too much to think a referee can distinguish between
careless and reckless on the fly.

A system similar to basketball’s, in which accumulated fouls
lead to expulsion, and “flagrant” fouls are heavily punished, would be easier
to put into practice, especially if an off-field official kept track of the
running totals.

The general principle here is that we don’t want small
differences in behavior, which are difficult for a regulator to distinguish, to
lead to large differences in punishment.

REDUCE FAKING Finally, there is the problem of diving. After
falling, players routinely writhe on the ground until the referee either
believes they’ve been injured, ignores them or, rarely, imposes penalties for
“simulation.” These instant injury judgments are very difficult for a single
on-field referee.

Such decisions might be turned over to referees watching video
monitors – and empowered to impose stiff penalties for faking. Diving is the
soccer version of the inevitable attempts to influence financial regulators, in
matters both legal and illegal. One can think of video replays as a
transparency requirement. We can’t expect to eliminate special pleading by
financiers for taxpayer bailouts, of course, but perhaps we can reduce the
impact of such efforts by opening them to public view through increased
disclosure about the process and its beneficiaries.

New rules in either soccer or finance shouldn’t put any more
burden on individual referees. As Larry Summers, the director of the National
Economic Council, said recently, in revising financial regulations, we do not
want to require anyone to get any smarter.

Richard H. Thaler is a
professor of economics and behavioral science at the Booth School of Business
at the University of Chicago.

© 2010 New York Times News Service