- Lewis, Michael. Moneyball. New York:
W. W. Norton, [2003] 2004. ISBN 0-393-32481-8.
- Everybody knows there's no faster or more reliable way
to make a lot of money than to identify an inefficiency in a market
and arbitrage it. (If you didn't know that, consider it free
advice and worth everything you paid for it!) Modern financial markets
are Hellishly efficient. Millions of players armed with real-time
transaction data, massive computing and database resources for data
mining, and more math, physics, and economics Ph.D.s than a dozen Ivy
League campuses are continuously looking for the slightest discrepancy
between price and value, which more or less guarantees that even when
one is discovered, it won't last for more than a moment, and that by
the time you hear about it, it'll be long gone. It's much easier
to find opportunities in slower moving, less intensely scrutinised
fields where conventional wisdom and lack of imagination can blind
those in the market to lucrative inefficiencies. For example, in
the 1980s generic personal computers and graphics adaptors became
comparable in performance to special purpose computer aided design
(CAD) workstations ten times or more as costly. This created a
situation where the entire value-added in CAD was software,
not hardware—all the hardware development, manufacturing, and support
costs of the existing vendors were simply an inefficiency which cost
their customers dearly. Folks who recognised this inefficiency and
moved to exploit the opportunity it created were well rewarded, even while their
products were still being ridiculed or ignored by “serious vendors”.
Opportunities like this don't come around very often, and there's a lot
of luck involved in being in the right place at the right time with
the skills and resources at hand to exploit one when you do spot it.
But just imagine what you could do in a field mired in tradition,
superstition, ignorance, meaningless numbers, a self-perpetuating
old boy network, and gross disparities between spending and
performance…Major League Baseball, say?
Starting in the 1970s and 80s, Bill James and a slowly growing group
of statistically knowledgeable and scientifically minded baseball
fanatics—outsiders all—began to look beyond conventional statistics
and box scores and study what really determines how many runs
a team will score and how many games it will win. Their results turned
conventional wisdom completely on its head and that, combined with the
clubbiness of professional baseball, caused their work to be utterly
ignored until Billy Beane became general manager of the Oakland A's
in 1997. Beane and his statistics wizard Paul DePodesta were faced
with the challenge of building a winning team with a budget for player
salaries right at the bottom of the league—they had less to spend on
the entire roster than some teams spent on three or four superstar free
agents. I've always been fond of the phrase “management by lack of
alternatives”, and that's the situation Beane faced. He took on board
the wisdom of the fan statisticians and built upon it, to numerically
estimate the value in runs—the ultimate currency of baseball—of
individual players, and compare that to the cost of acquiring them.
He quickly discovered the market in professional baseball players
was grossly inefficient—teams were paying millions for players with
statistics which contributed little or nothing to runs scored and
games won, while players with the numbers that really mattered were
languishing in the minors, available for a song.
The Oakland A's
are short for “Athletics”, but under Beane it might as well have been
“Arbitrageurs”—trading overvalued stars for cash, draft picks, and
undervalued unknowns spotted by the statistical model. Conventional
scouting went out the window; the A's roster was full of people who
didn't look like baseball players but fit the mathematical profile.
Further, Beane changed the way the game was played—if the numbers said
stolen bases and sacrifice bunts were a net loss in runs long-term,
then the A's didn't do them. The sportswriters and other teams thought
it was crazy, but it won ball games: an amazing 103 in 2002 with a
total payroll of less than US$42 million. In most other markets or
businesses competitors would be tripping over one another to copy the
methods which produced such results, but so hidebound and inbred is
baseball that so far only two other teams have adopted the Oakland
way of winning. Writing on the opening day of the 2004 World Series,
is is interesting to observe than one of those two is the Boston
Red Sox. I must observe, however, amongst rooting for the scientific
method and high fives for budget discipline and number crunching, that
the ultimate product of professional baseball is not runs scored, nor
games, pennants, or World Series won, but rather entertainment
and the revenue it generates from fans, directly or indirectly.
One wonders whether this new style of MBAseball run from the front
office will ultimately be as enjoyable as the intuitive, risk-taking,
seat of the pants game contested from the dugout by a Leo Durocher,
Casey Stengel, or Earl Weaver. This superbly written, fascinating
book is by the author of the almost indescribably excellent Liar's Poker. The 2004 paperback
edition contains an Afterword recounting the “religious war” the
original 2003 hardcover ignited. Again, this is a book recommended
by an anonymous visitor with the
recommendation form—thanks, Joe!
October 2004 