Tuesday, September 27, 2011

The Dismal Economics of Moneyball

Moneyball is a huge hit, which doesn’t happen too often to movies featuring an economics major who’s good at statistics. It tells the true story of how the Oakland A’s became a competitive team despite having a payroll less than 1/3 of the Yankees. They did it by using statistical techniques pioneered by sabermetrician Bill James and applied by Harvard economics grad Paul DePodesta. For instance, old school baseball scouts undervalued the simple talent of getting on base via walks. That’s not very exciting, but a team the does it over and over tends to win more than its competitors. By combing through the data to find undervalued traits like drawing walks, the Oakland A’s were able to find talented players without spending a lot of money.

To an economist, that’s a story not only about the power of information, but also the importance of innovation in creating competitive advantage. Oakland’s General Manager, Billy Beane, didn’t compete the same way as all the other teams, he did something new and different, and that gave the A’s an edge.

However, that’ s not the end of the story. Competition leads others to match that innovation, and over time, the excess returns are competed away. Oakland’s competitive secret didn’t not remain a secret for long. In 2003, when Michael Lewis's book Moneyball was published, the Boston Red Sox hired Bill James to advise them, and apply analytic techniques to optimize their much larger payroll. They promptly won the World Series the next year, and again in 2007. Today there are whole conferences, like the MIT Sloan Sports Analytics Conference devoted to these techniques. So does Moneyball still provide an edge?

According to an academic study by Jahn Hakes and Raymond Sauer:

….certain baseball skills were valued inefficiently [in 1999-2002] and this inefficiency was profitably exploited by managers with the ability to generate and interpret statistical knowledge. Consistent with Lewis’s story and economic reasoning, as knowledge of the inefficiency became increasingly dispersed across baseball teams the market corrected the original mispricing.

Sadly, the insights Bill James identified no longer provide a measurable advantage. This year, Oakland will finish with another losing season. And my beloved Red Sox? They lost their lead in the wildcard race tonight and may not make the playoffs. Time to hunt for the next big innovation.

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