THE OLYMPICS BANKRUPTCY MACHINE

In 1970, Denver, Colorado, was awarded the 1976 Winter Olympics. Everyone felt the location would be ideal to celebrate both America's bicentennial and Colorado's centennial. Despite the fact that the previous Winter Olympics had cost over $1 billion to produce, Denver boasted that they could do it for $14 million. But the citizens of Denver disagreed, and after two years of protests and pushback, Denver became the first, and only, city to rescind their bid to host the Olympics. The move forced the International Olympic Committee (IOC) to scramble for a new host, and in three months, the group chose Innsbruck, Austria, the Winter Olympics host twelve years earlier. The 1976 Games ended up costing over $100 million, more than seven times Denver's original estimate. Montreal's Summer Games that same year came with a $6 billion price tag and a $1.5 billion loss, bankrupting the city and saddling its citizens with 30 years of debt. Denver and Montreal sparked a discussion that continues to this day. Is it ever worth it for any city to host a megaevent like the Olympics, and if not, why do we keep doing it?

The modern Olympics movement was conceived as a classic, non-profit endeavor. The IOC didn't have much of a budget at all, and the Games were subsidized by the national governments of the host cities. The Berlin Games in 1936 were a turning point for a number of reasons, which you can learn about on this month's episode of our sister podcast, How Marketing Changed the World. The Germans presented a $30 million spectacle that outspent almost all the previous Olympics combined, and set the Olympics on a trajectory to grow far beyond their original intent, and that growth came with a huge cost increase.

A 2012 study by the University of Oxford explored the economics of the Olympics compared with other huge events, specifically after 1960 when the Games became more outlandish. The researchers discovered two unique characteristics of the Olympics. While almost all large projects tend to run over budget, the Olympics do so at a real average of 179%, nominally 324%, much larger than all other megaprojects. And statistically every type of megaproject occasionally remains within the forecasted budget, but the Olympics never do. The conclusion was that the Olympics are "one of the most financially risky type of megaproject that exists."

Studying the trend of overall costs to host the Olympics, one can watch the totals climb after the 1936 Games in Berlin until 1968. During the first half of the 20th century, profits were not an expectation or goal, and country governments were content to fund the Games. But beginning in 1972, the cost to host the games grew 1262%, and the possibilities for huge losses became a stark reality. Of the 53 Olympic Games which have been held, 20 Games (38%) have turned a profit for a total of $1.3 billion. Only thirteen Games (25%) have lost money, but the deficits total $5.7 billion. So losses aren't the norm, but when a city loses, it tends to lose big. The average net loss for all Olympic Games is $84 million. It's worth noting that the remaining 20 games that have registered a break-even point were all subsidized by their national governments, and most never published detailed financials as a result. So most of those games probably posted a loss as well, but the host city never had to address it.

OLYMPIC GAMES COSTS VS. PROFIT IN MILLIONS OF DOLLARS FROM 1896 TO 1968

Olympics costs

OLYMPIC GAMES COSTS VS. PROFIT IN BILLIONS OF DOLLARS FROM 1972 TO 2022

Olympics costs

An updated 2016 Oxford study of the costs and overruns of the Olympics revealed that recent Games now average $8.9 billion in total cost. More significantly, the average budget excess for Winter Games is $3.1 billion and the average excess for Summer Games is $5.2 billion. Again, the authors observed that the Olympics maintained a higher percentage of budgetary overrun and was the only group of events that consistently exceed budget expectations when compared to any other large-scale event. They also noted that their figures were based solely on sports-related costs, and that the addition of infrastructure, transportation, and tourism costs which always accompany the Games push those values even higher.

Accuracy in forecasting has been identified as a problem in projects of every size and scope. In 1977, two psychologists coined the term "planning fallacy" to describe the human tendency to focus on a specific project as unique rather than considering the historical realities of similar projects. This limited vision usually leads to gross underestimations of the time and cost necessary to complete a project. The planning fallacy was expanded to also include "optimism bias" in 2003, recognizing that most people tend to focus on benefits over risks. A final phrase was added to these ideas in a 2017 study of megaprojects: "strategic misrepresentation." Simply put, strategic misrepresentation is the practice of distorting information in order to appear more capable of fulfilling the requirements for a project.

Planning fallacy, optimism bias, and strategic misrepresentation are not inherently detrimental. In fact, several economists have argued that they are necessary for success. The danger is in having no awareness of these biases and failing to adjust behavior and expectations accordingly. The bids for Olympic Games repeatedly follow every aspect of these three concepts. They are always aggressively optimistic, ignore all previous issues and pitfalls, and present the best possible plan at the least possible cost to win the bid. Upon winning, the organizers then have to face the repercussions of their own fallacies as their event follows the same pathway as every other Olympics and costs skyrocket.

Most investigations into Olympics costs and overruns ultimately blame the IOC for the phenomenon. For the first several decades of its existence, the IOC operated with a five-figure budget. As time passed and leadership changed, the IOC realized it needed a better financial model to sustain its mission. In the 1970s, two things became obvious financial solutions: television broadcasting and corporate sponsorships. IOC revenue began climbing in 1972 at exactly the same time overall costs to host the Olympics began increasing. In 1971, the IOC seized control of all broadcasting rights for the Olympics, and in 1985 it established its Olympic Partner Programme which offers exclusive sponsorships to select companies. Broadcasting and sponsorships now comprise 90% of the IOC's revenue, which was $2.4 billion in 2022.

IOC REVENUES IN MILLIONS OF DOLLARS

IOC revenues

While the IOC makes an incredible amount of money, and has subsequently suffered several financial scandals, as a non-profit entity it gives 90% of its earnings away. There are dozens of sports programs around the world which would not exist without IOC funding. The IOC also gives about $1 billion to every host city to help subsidize the cost of the Games. Granted, this is only 17% of the necessary cost on average, but the grotesque overruns of the Olympics can hardly be leveled on the leadership of the IOC. Our own basic psychology continues to fuel the problem of the Olympics, and simply understanding our own inherent biases can be enough to improve the planning and bidding processes. Hosting the Olympics is not an automatic bankruptcy, as attested to by 75% of the Games. Experts have identified the causes and provided solutions to avoid enormous budget excesses. As is often the case, data can provide better information, more accurate planning, and more economical events, even with something as immense as the Olympics.

All of this has addressed the costs involved in hosting the Olympics, but there's another cost which has been revealed to be even more substantial and important: the cost of maintaining enormous, specialized venues. Many of them are never used again, but require millions of dollars to maintain. This adds another dimension to the economic problem of the Olympics, and brings us back to the original question. Why do we keep doing this?

We keep doing this because, for all their faults, the Olympic Games have succeeded in their original mission to "build a better world through sport." The modern Olympics was conceived as a movement where athletic competition could elevate the potential of the human body, inspire the human spirit, and promote world peace. Over the past twenty years, more than half the world population has watched the Summer Olympics, and more than one third of the world population has watched the Winter Olympics. Clearly, something in these competitions resonates with the majority of humanity. In addition to the Summer and Winter Games, the IOC has directly led to the formation of the Paralympic Games, the Youth Olympic Games, the five Continental Games, the World Games, and the Special Olympics, involving over five million athletes on every continent each year, and over half the global population in support of those athletic endeavors. No other movement in the history of this planet has come close to uniting all of humanity in such a way.