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Quants Overtake Sports April 16, 2010

Posted by Amir Roth in books, business, sports.
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Have you read Michael Lewis’ book “Moneyball?” At its face, the book is about Billy Beane, general manager of the Oakland A’s and how he used “sabermetrics” (advanced baseball statistics, sabermetrics is a phoneticization of SABR metrics and SABR stands for Society for American Baseball Research) to build a team that games at a rate much higher than would be suggested by its payroll. But really, the book is about how advanced statistical analysis is changing the ways in which baseball players are evaluated, and the basic structure and composition of baseball front offices. Organizations that used to be dominated by ex-players and professional scouts (most of whom are also ex-players, at least ex-minor-league-players) is now heavily populated by average-fan-stat-geeks with no playing experience above tee-ball. Billy Beane is a stat-head, but he also played in the majors, albeit not very well. Theo Epstein has been running the Boston RedSox (perhaps the second cushiest gig in all of baseball, right behind the Yankees) since 2002 when he was 29 years old! His credentials? He graduated from Yale with a degree in American Studies! He didn’t play baseball for Yale. He didn’t even play baseball in high school. He just graduated from Yale. I graduated from Yale dammit! I demand the Philadelphia Eagles give me executive power over player personnel decisions immediately! Move over, Howie!

The story of advanced statistical analysis and baseball is pretty fascinating. Essentially for the first 100 years of its existence, baseball kept relatively detailed statistics, but evaluated players using only a few of them. Offensive players were evaluated based on batting average, home runs, runs batted in, runs scored, and stolen bases. Defensively, they were evaluated on the number of fielding errors they committed at their position. Pitchers were evaluated on innings pitched, strikeouts, wins, saves, and ERA (earned run average) or how many “earned” runs—runs that aren’t the result of their own teammates’ errors—they gave up per nine innings of work. That was the hard data. The rest was scouting reports. “This guy can’t hit curveballs.” “This guy doesn’t change his pitching pattern from one turn through the order to another.” Stuff like that.

Somehow, baseball survived. But there were player evaluation and valuation inefficiencies. The SABR statheads, led by baseball outsider Bill James, noticed first. And Billy Beane was the first major league general to actually use these advanced statistics to gain a competitive advantage over his fellow general managers. Unlike the other major professional sports, baseball operates without a salary cap and has guaranteed contracts. This puts small-market low-revenue teams, like Beane’s Oakland team, at a great competitive disadvantage against large-market high-revenue teams like the New York Yankees, Boston RedSox, Chicago Cubs, Los Angeles Dodgers, etc. Ingeniously, Beane looked to these advanced statistics to try to discover under-valued individual performance factors—factors that weren’t widely valued but which correlated well either with team success, either in scoring runs or preventing them—and to acquire under-valued players. In fact, his favorite maneuver was to trade overvalued players for undervalued ones to other contending teams at the midseason trade deadline, effectively strengthening his own team while weakening the competitor at the same time.

Essentially, Beane was the first “quant” in baseball. And he had the same advantage that the first quants on Wall Street had. From the late 1990’s to the early 2000’s Beane put together teams that played way above their payroll. The A’s didn’t win a World Series during this period. They didn’t even go to the world Series. But they won a ton of games. And at least made the playoffs every year. But just like on Wall Street, in traffic, and nearly everywhere else, the “fallacy” of composition eventually takes over and first mover advantage shrinks when others in the market start to copy his tactics. To stay ahead, the first mover has to constantly innovate and look for an edge. Standing still is falling behind. And other teams did start to copy Beane’s tactics. Several teams, like the Dodgers and Bluejays (no relation), hired his assistants. Others, like Boston hired new guard GM’s who valued advanced statistical analysis.

Beane gained his initial advantage by valuing on-base-percentage (OBP) over batting average, essentially realizing that getting on base in any way is a more directly correlated with team scoring than getting on base by hitting. Essentially, Beane understood that drawing walks is a vastly undervalued skill and assembled teams with players who were proficient in this skill. In retrospect, this is obvious. In fact, it’s so obvious that walks are now part of official boxscores on ESPN, CBS sportsline, CNN SI, and MLB.com and ESPN prints OBP, number of pitches seen and slugging percentage too. It’s been this way for a couple of years. 15 years ago nobody cared. After the OBP arbitrage window closed, Beane exploited defense, college power pitchers,  stars in the middle of the last year of their contracts, stars in the first years of long term contracts, and aging position players on one year deals. But the marginal advantage of each move was smaller than the previous one, and the number of teams that weren’t employing advanced stats was shrinking. By the mid 2000’s Beane lost his advantage and the A’s regained a place in the standing more commensurate with their fiscal wherewithal—last. If you want to get a taste of the kind of statistics used in player evaluation article read this little piece by longtime statistic denier Bill Simmons aka “The Sports Guy.”

Anyways, baseball is not the only sport being overtaken by quants. The NBA’s Houston Rockets GM is Daryl Morey. Morey doesn’t have a basketball background. He is a computer science major from Northwestern and has an MBA from Sloan. He’s a stats geek. The NBA is using more advanced statistics too. Rebounding rate. True shooting percentage. Points created per touch. Turnovers per touch. Individual plus/minus and plus/minus for each five-man combination. The Philadelphia Eagles new general manager is Howie Roseman. Howie went to Florida—and so at least he went to a football powerhouse school even if he didn’t play there—majored in who-knows-what and has a JD from Fordham. Detailed individual player stats are hard to come by in football except for select positions like quarterback, running back, wide receiver, but statistical analysis is becoming more widespread anyways. Just look at this analysis of the recent trade of Donovan McNabb from the Eagles to division rival Washington. I could probably give you an example from hockey, but I don’t know the first thing about that sport, nor do I care to learn it.

It’s amazing advanced quantitative analysis can provide temporary advantages and transform valuation practices and organizational charts in pretty much any competitive market. And what market is more transparently competitive than pro sports?

P.S. What’s the next leverage point in baseball? My guess would be pitcher injury risk. There is a great little website called drivelinemechanics.com which analyzes the motions of different pitchers, assesses the strains and stresses on their joints and ligaments, and estimates their chances of future injury. I found this website early last summer. At the time, it predicted that New York Met John Maine would suffer an elbow injury within the next two seasons because he had an “unsustainable” flinging-style motion. Maine was lost for the season the following week!

P.P.S. Rut-ro!

P.P.P.S. It’s too bad Michigan doesn’t have the death penalty.

P.P.P.P.S. Iceland is back up to #1 on list of places I wanted to visit (it was temporarily displaced by Hong Kong).

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