Wednesday, 11 January 2012

Clarissa (and Alan Potts) Explains Moneyball

I did not watch 'Clarissa Explains It All' when I was young as I did not have Nickelodeon. I do,however, remember seeing lots of ads for it. One of them brought to my attention this very important point: there is a difference between 'John and me' and 'John and I'. I started paying attention to it and it became apparent that correcting  'John and me' to 'John and I'  was a convenient hook for establishing a character's intelligence. Somewhere along the line, however, I noticed that these characters were always correcting 'John and me' to 'John and I'* - even when the latter was correct. This is an overcorrection and it is a sign that somebody does not understand what they have learned or taken the wrong lesson from an example.

*Here is a simple guideline: cover the 'John and' part and decide which word you would choose. 1) I went to the park => John and I went to the park. 2) Is that for me? => Is that for John and me?

When I read Moneyball, by Michael Lewis, I felt as if I had read the equivalent  book already, 'Against The Crowd' by Alan Potts - and read its sequel 'The Inside Track' . Horse racing markets and the free agent market in baseball are types of auction markets or, more generally, dynamic markets. In the opening chaper of 'The Inside Track' Potts describes the difficulty he is having in finding value. Since the publication of his previous book the market has taken on the information - mainly through value-betting tipsters in the major racing publications - and there are smaller prices available on the horses he would normally bet on. That is to say the markets had been corrected*. To continue to make money he would have to stay ahead of the field - he would have to innovate.

* I think of correcting a market as creating a more accurate representation of it. 

In baseball there are 30 General Manager positions. It a multi-million dollar salaried position. You think the remuneration and scarcity of positions would lead to a  high calibre of employee, ones who would be able to correct a market when new information* would present itself. Moneyball spoke of high OBP players, poor and slow defenders, safe college draft picks, and railed against the evils of the stolen base. Instead in 2008 we got the worst-to-first Rays, who were built on athletic upside-heavy high-school draft picks that led the league in stolen bases and in defensive runs saved. That was an overcorrection.

* That there is no new information in Moneyball is the clue. I love the coins argument in the article referenced in that link. I think I will find good use for it.

If you think you have found value in a dynamic market, it is good practice to ask yourself why the market is wrong. Perhaps you have better information, perhaps you have analysed it better, it is not important what it is - just that there is something.

For example, in a mystery sport you are looking at an early-season match-up between Team A at home against Team B. Team A has won its first three games at home and Team B has lost its first three games away. You have decided that Team A is good at home and Team B is bad on the road. Therefore you decide to back Team A to win. Is this a good idea? Let's ask the important questions:

Do you have better information? No, they print this information on the betting slips. Everybody looking at this game will have that information and take it into account.

Have you made better use of the information? No, every casual punter will see the same thing and come to the same conclusion.

Therefore on this occasion you have not found value. By contrast, the principles in Moneyball worked because decision makers decided that there was a right wy to win baseball games and ignored evidence against it. In upcoming posts with the title 'Moneyball' I will provide examples where the market was demonstrably wrong. The first of which will be 'Moneyball: Refuse To Bend'

This was all a long-winded method of saying that this article on why fans should not be too excited when their team hires a sabremetrically-oriented genral Manager.
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