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The Real Lessons of Moneyball


We are deep into October. The Yankees and Red Sox have been sent home, but the Oakland Athletics are still thrilling fans on a nightly basis. It’s the 2002 A’s, not 2011, and their exploits can be seen only on a dwindling number of movie screens. But we A’s fans (I’ve been one since the early 1970s) take what we can get.

What we get is a movie, Moneyball, in which Brad Pitt, as A’s General Manager Billy Beane, throws a few chairs and craftily rebuilds his team into a 103-game winner after the departure of three stars Oakland can’t afford to keep. We also get a seemingly unending 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. Is Beane an innovative genius? A fraud? Just lucky? Is scientific analysis the key to success in sports and in life? Is baseball fair? My A’s are no longer just a baseball team; they are a heavily freighted metaphor.

As recounted in the 2003 Michael Lewis book upon which the movie Moneyball was based, Beane was among the first high-level baseball executives (the first was his predecessor and mentor, Sandy Alderson) to openly embrace what baseball geeks call sabermetrics, commonly known in the business world as data analytics. Through the unsentimental use of statistics, Beane was able, in Lewis’s telling, to exploit inefficiencies in the market for baseball talent and build a low-budget team that triumphed over lavishly funded foes.

Moneyball quickly became a business classic, and deservedly so. It’s a lot more fun to read than your average business book, making brainy iconoclasm seem heroic. Plus, baseball possesses two characteristics that in business exist only in the abstract: a level playing field (except for the pitcher’s mound) and truly reliable performance metrics. As a result, cause and effect are clearer. You can isolate successful behaviors and counterproductive ones. All this makes baseball a great demonstration ground for concepts with application elsewhere. But the most useful lessons to be drawn from the recent history of the Oakland A’s—and, for that matter, from sports in general—may not be the ones celebrated in Moneyball.

The concept at the heart of Moneyball is the efficient market hypothesis. As originally formulated in the 1960s, this theory held that on a big, transparent market such as the New York Stock Exchange (NYX), hard-nosed speculators will quickly sniff out discrepancies between asset prices and fundamental value. Through what’s called arbitrage—buying underpriced assets and short-selling overpriced ones—these geniuses get rich and the discrepancies disappear. Meanwhile, the goofballs who peruse market charts in search of secret meanings, or buy a stock because they just read about it in the Wall Street Journal, lose their money. The result: an efficient market.

In recent years, scholars have poked lots of holes in the belief that real-world financial markets approach this ideal. Emotion and shortsightedness can prevail for long periods. Arbitrageurs who are correct in their assessment of fundamental values can still lose all their money if they get the timing wrong. Goofballs sometimes get rich.

In sports, unlike finance, the fundamentals are there for everyone to see. Earnings per share can be manipulated; earned run average cannot. So you might think it would be harder for inefficiencies to persist. Yet they do.

The inefficiency at the heart of Moneyball had to do with on-base percentage. It’s a better metric of offensive value than batting average, but in the early 2000s a team could hire a player with a high on-base percentage but a middling batting average (that is, somebody who walks a lot) at a discount. When Clemson University economists Jahn K. Hakes and Raymond D. Sauer set out to test what they called “the Moneyball hypothesis” a few years ago, 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.

So that particular inefficiency disappeared. But many sports inefficiencies remain. In 2002, University of California at Berkeley economist David Romer found that National Football League coaches kick on fourth down more often than statistics indicate they should. In several cases, including fourth-and-goal situations early in games, their timid choices “represent clear-cut and large departures from win-maximization.” Romer’s paper got some attention in the NFL, but it has had almost no discernible impact on behavior. Going for it on fourth down is still seen as a daredevil move.

In another football study, B. Cade Massey of Yale School of Management 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. Their finding: 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. I asked Thaler, a prominent critic of the efficient market hypothesis in finance, whether he thought the market for stocks or the market for sports talent was more efficient. “The NFL draft is certainly less efficient,” he e-mailed back. “The bad teams get the early, over-valued picks. The smart teams like the New England Patriots do not.” And there is no way to arbitrage away this inefficiency. The smart teams “cannot sell the top pick short, nor can you sell a bad team short. 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.”

The key here is the owners. “If you have a crappy owner who consistently makes bad decisions, it is difficult to wrestle the team away from him,” says Thaler’s Chicago colleague Tobias J. Moskowitz. In his book Scorecasting, co-authored with Sports Illustrated writer L. Jon Wertheim, Moskowitz offers a related explanation for the perennial miserableness of the Chicago Cubs. The correlation between on-field performance and game attendance is lower for the Cubs than any other baseball team. Wrigley Field is usually packed no matter what, so the team’s owners have no economic reason to field a winner.

That’s not true for every sad sack franchise, of course. And yet sports—at least, team sports on the American model—lack many of the usual market mechanisms for rooting out inefficiency. Poor on-field performance doesn’t necessarily drive owners out of business. And there are, varying by sport, all sorts of mechanisms 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 the draft doles out. 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 the book Moneyball is subtitled The Art of Winning an Unfair Game. Yet the team with the second-lowest payroll, Tampa Bay, 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 secret of sabermetrics is out, but baseball remains a deeply and gratifyingly inefficient market.

So why can’t Billy Beane keep building winners? You wouldn’t know it from the movie Moneyball, which 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 organization’s farm system. Shortstop Miguel Tejada was the American League’s Most Valuable Player that year. Pitcher Barry Zito won the Cy Young Award; fellow starters Tim Hudson and Mark Mulder had been runners-up for the award in 2000 and 2001.

There is simply too much uncertainty in player development to allow a team to field a crop of brilliant homegrown performers like that on a regular basis. And 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. During the A’s run of success, Beane repeatedly could jury-rig replacements as his stars left. But keeping that up is hard.

It didn’t help that the one time Beane bet big to keep a player from leaving, it failed to pay off. In 2004, the general manager looked at third baseman Eric Chavez and saw a future Hall of Famer. So he signed him to a six-year, $66 million contract. A year later, Chavez began struggling with a debilitating series of back, neck, and shoulder injuries. Now that’s unfair. It’s also an indication that maybe the world shouldn’t be reading quite so much into the ups and downs of the Oakland A’s. Sometimes, in sports and in life, stuff just happens.

Fox is editorial director of the Harvard Business Review Group.

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