Oct. 20 (Bloomberg) -- The Oakland Athletics -- the 2002 version -- keep winning, while Major League Baseball for the most part has passed them by.
As the St. Louis Cardinals and the Texas Rangers meet in the World Series, “Moneyball,” starring Brad Pitt as A’s General Manager Billy Beane, is treating movie-goers to the tale of how Oakland a decade ago rebuilt into a 103-game winner after the departure of three stars it couldn’t afford to keep.
It’s also created a debate over what the A’s run of success but not quite triumph from 2000 through 2006, and the team’s subsequent failure to put together a winning season, really means, according to the Oct. 24 issue of Bloomberg Businessweek.
As recounted in the 2003 Michael Lewis book upon which the movie is based, Beane was among the first high-level baseball executives to embrace sabermetrics, commonly known in the business world as data analytics. Through the statistics, Lewis wrote, Beane exploited inefficiencies in the market for talent and built a low-budget team that triumphed over richer foes.
The book quickly became a business classic, making brainy iconoclasm seem heroic. Plus, baseball has two characteristics that exist in business only in the abstract: a level playing field and truly reliable performance metrics. Cause and effect are clearer, and successful behaviors and counterproductive ones can be isolated.
But the most useful lessons to be drawn from the recent history of the A’s -- and sports in general -- may not be the ones celebrated in the book and movie.
The concept at the heart of “Moneyball” is the efficient market hypothesis. This holds that on a big, transparent market, speculators will sniff out discrepancies between asset prices and fundamental value.
Buying underpriced assets and short-selling overpriced ones -- arbitrage -- makes these practitioners rich and the discrepancies disappear. Those who peruse market charts in search of secret meanings, or buy a stock because they just read about it, lose money. The result: an efficient market.
Scholars in recent years have attacked the belief that financial markets approach this ideal. Emotion and shortsightedness can prevail for long periods. Arbitragers who are correct in their assessment of fundamental values can still lose if the timing’s wrong. Those seeking a secret meaning or betting a hunch sometimes get rich.
In sports, the fundamentals are there for everyone to see. Earnings per share can be manipulated; earned run average cannot. Yet inefficiencies persist, including one at the heart of “Moneyball” -- on-base percentage.
In the early 2000s, a team could hire a player with a high on-base percentage but a middling batting average -- one who walks a lot -- at a discount.
When economists Jahn K. Hakes and Raymond D. Sauer of Clemson University in Clemson, South Carolina, set out to test what they called “the Moneyball hypothesis,” they found that on-base percentage was deeply undervalued through the 2002 season. The price began to go up in 2003, as other teams -- notably the Boston Red Sox -- began to emulate Beane’s approach. By 2004, after Lewis’s book had topped the best-seller lists, players with high on-base percentage were no longer a bargain.
Much sports inefficiency remains. In 2002, economist David Romer of the University of California, Berkeley, found that National Football League coaches kick on fourth down more often than statistics indicate they should. In several cases, including fourth-and-goal early in games, their choices “represent clear-cut and large departures from win-maximization,” Romer said.
This got some attention in the NFL without much change in behavior. Going for it on fourth down is still seen as a daring move.
B. Cade Massey of Yale School of Management in New Haven, Connecticut, and Richard H. Thaler of the University of Chicago Booth School of Business looked at how top picks in the NFL draft performed in comparison with those chosen later. They found players drafted high in the first round were persistently overvalued both in terms of the salaries they received and the picks they could be traded for.
Thaler, a critic of the efficiency hypothesis in finance, said in an e-mail that the football draft “is certainly less efficient” that the stock market.
“The bad teams get the early, over-valued picks,” he said. “The smart teams like the New England Patriots do not.”
There is no way to arbitrage away this inefficiency, according to Thaler.
“About the best you can do is try to buy up a bad team, but even this strategy will not necessarily work since someone dumb may outbid you for the team,” he said.
The key is the owners, says Thaler’s Chicago colleague Tobias J. Moskowitz.
“If you have a crappy owner who consistently makes bad decisions, it is difficult to wrestle the team away from him,” he said.
In “Scorecasting,” a book he co-wrote with L. Jon Wertheim of Sports Illustrated, Moskowitz offers the Chicago Cubs, who haven’t reached the World Series since 1945 and last won baseball’s championship in 1908.
The correlation between on-field performance and game attendance is lower for the Cubs than any other baseball team. Wrigley Field is usually packed, so the owners have no economic reason to field a winner.
Poor on-field performance doesn’t necessarily drive owners out of business, and mechanisms exist to protect the weak, from salary caps and revenue sharing to a draft system that gives the best picks to the worst teams. The losers may fail to take proper advantage of the gifts but they’re still getting a gift.
Baseball has no salary cap, allowing the richest teams to outspend the poorest by as much as 5 to 1. That’s why Lewis’s book was subtitled, “ The Art of Winning an Unfair Game.” Yet the team with the second-lowest payroll, the Tampa Bay Rays, was in the playoffs this year; none of the four teams that made it to the League Championship Series was in the payroll Top 10.
The movie version of “Moneyball” focuses on a few veterans acquired over the off-season, but the 2002 A’s team was actually built around a crop of young stars drafted in the 1990s and brought up through the farm system. Shortstop Miguel Tejada was the American League’s Most Valuable Player that year. Barry Zito won the Cy Young Award as the AL’s best pitcher, after teammates Tim Hudson and Mark Mulder were runners-up for the honor in 2000 and 2001.
Once the team’s young stars had played long enough to be eligible for free agency, the A’s usually could no longer afford them. When Beane bet big to keep a player from leaving, it failed to pay off.
In 2004, the general manager signed third baseman Eric Chavez to a six-year, $66 million contract. A year later, Chavez began struggling with back, neck, and shoulder injuries.
Sometimes, in sports and in life, stuff just happens.
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