June 22, 2003
From the desk of Mindles H. Dreck:Everything That Can be Known is Already Known...
Matt Welch writes about Moneyball:
It's about baseball -- specifically, about how such teams as the Oakland A's and Toronto Blue Jays finally recognized and exploited a decades-old grassroots revolution in statistical analysis -- but you do not need be a baseball fan to thrill to the potential analogies it has for the world at large.......What lessons can we learn from this tale? That the pursuit of better information will eventually unearth discrepancies and irrationalities, even in a field as seemingly well-studied as baseball. That the gatekeepers of information and judgment will instinctively and defensively protect their turf, rather than question their own legitimacy. That intelligence and passion can still win in the end, especially if they take advantage of the networking power of the Web.
The most obvious application for these lessons is in other sports, especially under-measured ones like professional basketball (already, several people have attempted to become "the Bill James of the NBA"). But any industry addicted to its own traditions, conventional in its hiring practices, and hostile to outsider analysis, is vulnerable. Especially if it attracts the attention of fanatical observers who publish their own Web sites.
Moneyball is the Story of A's manager Billy Beane, who mines the fertile yet well-studied data of baseball to produce a winning team on a tight budget. This book has been sitting on my nightstand since shortly after I heard this interview on Fresh Air and I will be reading it with my book group shortly.
As a market professional, with close colleagues engaged in the seemingly futile search to find an informational advantage in some of the most researched markets in the world, this book seems inspirational. But how might a financial professional capture the amateur energy unleashed in the collaboration that led to the A's stunning success?
By the late 1980s, members of the James-organized "Project Scoresheet" (now called Retrosheet) were attending nearly every professional game, writing down minute details of each play, and sharing it in a centralized database. People started proposing new theories and formulas, engaging in brutal but collegial peer review, and buying enough James books to make him a perennial best-seller."All these exquisitely trained, brilliantly successful scientists and mathematicians," Lewis writes, "were working for love, not money."
Yet the profit motive played a crucial role as well. Soon after James burst on the scene, Lewis points out, "two changes were about to occur that would make his questions not only more answerable but also more valuable. First came radical advances in computer technology: This dramatically reduced the cost of compiling and analyzing vast amounts of baseball data. Then came the boom in baseball players' salaries: This dramatically raised the benefits of having such knowledge."
But organized baseball couldn't be bothered with it. Almost every single decision-maker in a traditional baseball franchise, from general manager down to the lowliest talent scout, clung to the same comfortable prejudices and conventional wisdom that the Jameseans were now ridiculing.
The Old Guard wanted beautiful athletes; the New Guard preferred fat guys who could hit and draw walks. Baseball men loved to bunt and steal; the outsiders called such "little ball" a way to lose runs. General managers were forever drafting high school players; desktop dynamos said college men were far better prospects. Year after year, millions of dollars were being thrown at first basemen who hit home runs and relief pitchers who threw hard; the computer nerds argued the minor leagues were filled with similar players available at a fraction of the cost.
Hmm. That's a puzzle, as it seems a) that any informational advantage gained would be quickly transacted away and b) the ever-tightening regulations governing circulation of stock research would stifle an open-source style effort. Consider, for example, another Michael Lewis story - that of 15 year-old Jonathan Lebed:
Richard was Richard Walker, the S.E.C.'s director of enforcement. He entered with a smile, but mislaid it before he even sat down. His mind went from a standing start to deeply distressed inside of 10 seconds. "This kid was making predictions about the prices of stocks," he said testily. "He had no basis for making these predictions." Before I could tell him that sounds a lot like what happens every day on Wall Street, he said, "And don't tell me that's standard practice on Wall Street," so I didn't. But it is. It is still O.K. for the analysts to lowball their estimates of corporate earnings and plug the stocks of the companies they take public so that they remain in the good graces of those companies. The S.E.C. would protest that the analysts don't actually own the stocks they plug, but that is a distinction without a difference: they profit mightily and directly from its rise."Jonathan Lebed was seeking to manipulate the market," said Walker.
But that only begs the question. If Wall Street analysts and fund managers and corporate C.E.O.'s who appear on CNBC and CNNfn to plug stocks are not guilty of seeking to manipulate the market, what on earth does it mean to manipulate the market?
"It's when you promote a stock for the purpose of artificially raising its price."
But when a Wall Street analyst can send the price of a stock of a company that is losing billions of dollars up 50 points in a day, what does it mean to "artificially raise" the price of a stock? The law sounded perfectly circular. Actually, this point had been well made in a recent article in Business Crimes Bulletin by a pair of securities law experts, Lawrence S. Bader and Daniel B. Kosove. "The casebooks are filled with opinions that describe manipulation as causing an 'artificial' price," the experts wrote. "Unfortunately, the casebooks are short on opinions defining the word 'artificial' in this context. . . . By using the word 'artificial,' the courts have avoided coming to grips with the problem of defining 'manipulation'; they have simply substituted one undefined term for another."
Walker recited, "The price of a stock is artificially raised when subjected to something other than ordinary market forces."
But what are "ordinary market forces"?
An ordinary market force, it turned out, is one that does not cause the stock to rise artificially. In short, an ordinary market force is whatever the S.E.C. says it is, or what it can persuade the courts it is. And the S.E.C. does not view teenagers' broadcasting their opinions as "an ordinary market force." It can't. If it did, it would be compelled to face the deep complexity of the modern market -- and all of the strange new creatures who have become, with the help of the Internet, ordinary market forces. When the Internet collided with the stock market, Jonathan Lebed became a market force. Adolescence became a market force.
"[T]he gatekeepers of information and judgment will instinctively and defensively protect their turf, rather than question their own legitimacy." Posted by Mindles H. Dreck at June 22, 2003 9:44 PM | TrackBack | Technorati inbound links
The basis for interpreting and enforcing the law is clear when one realies its intent: the smacking down of 'upstarts,' motivated on one hand by the envy of the non-rich and the social-status-protection instincts of the born-rich on the other. "Manipulation" therefore is whatsoever is done by anyone who has gained fame and fortune 'too fast' such that there is either mileage to be made from a public persecution or where failure to act would mean the success of the intended victim would embolden too many others. In short, 'market manipulation,' like its brother 'insider trading,' is a political crime and the law is aimed squarely against the upper reaches of the middle class.
JJM
As you'll see when you read Moneyball, it took a while for the knowldge formulated outside of baseball to be properly implemented inside the game, in such fashion as to create a compelling/threatening counterexample. Why? In part because the barrier-to-entry problem is more pronounced in professional sports than in other industries - while an outsider could theoretically form a new securities company and use his insights to outcompete the big Wall Street rivals (not that that's easy), Billy Beane couldn't start a new baseball team to run - he had to convince an insider to give him an existing job.
For more, read here.
Once I read a Bill James essay on one of David Halberstam's baseball histories "Summer of
'46" or something.
It may have been the first recorded "fisking".
Halberstam interviewed a bunch of old-time players, edited the yarns, and passed it all off
as fact.
James went back to the newpaper sports pages, weather reports, and score cards of the actual games.
Almost invariably, Halberstam was reporting sheer fantasy.
Considering that Halberstam was one of the most respected reporters of what happened in VietNam,
I was forced to wonder if the man was similarly misleading me about the history of much more important events than baseball.
I did a little research of my own and decided he was.
As I grew older I decided MOST journalists, using the "interview and edit the yarns" technique, are equally unreliable.
Except, perhaps, sportswriters.
I'd really REALLY like to see a presidental primary election, in a field of 8 or so candidates, covered by people who know how to
cover a genuine horserace...
What is an ordinary market force?
A force that eminates from someone with a lot of money or who works for people with a lot of money.
Being on TV=an ordinary market force, whether you are smarter than some punk 15 year old or not.
Working for an investment firm=ordinary market force, whether you have conflicts of interest or not.
Fraudulent reporting=ordinary market force.
It goes on and on.
Mindles: Great post. Thought provoking. One comment:
In baseball, because of the restricted number of franchises and because it is just a game, you will have sophistictaed amateurs willing to give away their information for free. That wouldn't happen in the stock market, where any such amateurs wouldn't necessarily be willing to do so.
Moneyball (I haven't read it, yet) seems to be a story about the adoption of new information processing technology, not unlike what many oldline businesses went through in the '80s and '90s, with the advent of desktop PCs. Most businesses already used mainframe computers or service bureaus for "static" reporting: accounting, payroll, billing, etc. But planning iterations were too time consuming until PCs arrived, allowing non-standard analysis, alternative scenarios, and the like. Baseball is now using the computer to mine the data that is so abundant in the game, attempting to identify traits or trends that can be incorporated into player personnel decisions--but they've a long way yet to go.
One quick story on the resistance to IT use related to me by a major league scout. Scouting is the proverbial "looking for a needle in a haystack." It's also not so different from sales prospecting--identify where the customers are, and go look there. The scout used the last five major league drafts, and identified where the players were coming from. Pretty obvious that the three largest states were FL, TX, and CA. But the remainder also came broadly across the sun-belt. His suggestion was to concentrate the scouts in these regions, rather than geographically across 48 states, i.e. why have scouts attending games where they're unlikely to find a prospect. Team politics and reluctance to shake up status quo has so far resulted in a "not convinced" answer at the moment. Two caveats, 1) the scout is not a baseball lifer, but comes to it with previous exposure to IT and analysis, and 2) all MLB teams fund the MLB scouting bureau combine that reports on prospects across the entire country.
Bottom line: MLB teams have (apparently) used no tools to evaluate the productivity and performance of their scouting organizations.
I'll wait to read the book before concluding that Billy Beane is a genius, but I think it's likely that he is using information to his distinct advantage.
1. MARKET FORCES---Generally considered to be the ebb and flow WITHIN the market by the usual suspects; when an outside force, one that is not usual in the markets, like the Hunts with silver or soybeans in the 80's, enters with vast sums of money, this is considered an outside force. Never mind that what the Hunts tried to do was perfectly legal; they were destroyed by the old network of traders who got pissed off. One morning the Exchanges announced that only sell orders for silver would be accepted. Nice huh? That is an INSIDE force.
2. GATEKEEPERS---wrong. It is the entire system of fences that stops an innovation from taking over. This is bedcause the innovation will destroy the jobs of the entire fence network. Right now the specialists are preventing the NYSE from automating. This specialist network of runners, phone boys, arm wavers, and so on will all be out of work in a nanosecond. The entire system is supported by an army of parasitic "traders" who operate within the system in a quasi-legal way who will also lose their jobs. It can be argued that the current system is NOT market forces but anti-market forces.
When you read that book you will find that Bean simply employed the market analysis he used to trade bonds (not Barry) to build a baseball team. He just figured out by simple math that on-base percentage was more important than batting average, and that winning games was more important for a pitcher than his "look" (meaning height, weight, appearing fat, and so on); who would have thought that winning games was more important than how one looked.
You can do anything you like, as long as you don't succeed.
Trudy the Monkey
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