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.



8 Replies to “The Dismal Economics of Moneyball”

  1. I’m wondering why no NFL coach or manager applied similiar techniques within the world of football.

    Only a couple of days a ago I stumpled upon this article:

    There it was shown that NFL-Coaches make consistently wrong decision regarding the question go for it or punt within the 4. quarter.

    But even after the paper was published, nothing changed and they still do the same mistakes.

    1. Sascha… it’s funny that you mention it. I heard this season that the Detroit Lions are doing just that.

      The great lesson from the case study of the A’s is about marginal utility getting competed away. Sometimes we innovate and then rest on our laurels, we even get arrogant that whatever thinking we put into an innovation is beyond anyone else, disregarding the 6B people who are looking not only to mimic our successes, but innovate on them as well.

      That is the great game of the marketplace, but where “Billy Ball” involved an unprotectable innovation based on common sense, the A’s gains were not sustainable. At the end of the day, they still had a low payroll, and they could not reinvest enough to overcome those with more capacity to think and act over the long run.

      (I am a businessperson, not a trained economist, so forgive me if I am a little off. I found this blog today from Greg Mankiw’s blog, and am eager to see where it leads.)


    2. I read the same paper and heard one plausible explanation for the seeming lack of learning. NFL coaches aren’t just trying to win games; they’re also trying to avoid being fired. If they go for it on 4th down and fail, a lot of people will second guess them. If they do the conventional thing and punt, few people will question their decision. More secure coaches, like Bill Belichick, tend to go for it on fourth down more often.

  2. The economics aren’t “dismal”. They are fascinating. But I understand you feel dismal about the A’s and Red Sox – as I am writing this from Phildelphia…. 🙂 Great story!

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