Wednesday, August 4, 2010

Arbitrage, Derivative Valuation of Players and Game Theoretic Baseball

Moneyball Wikipedia Entry

A true story detailing the competitive advantage which results from a MLB team’s veneration for the objective analysis of baseball statistics (aka Sabermetrics) and their employ of a Harvard educated economist.

The competitive advantages detailed in the book include applications to prospect selection, player arbitrage, and hitting strategy.

Quantitative Methods Used To Eliminate Biases In Player Selection

  • Buy club footed pitchers and unattractive players with great statistics because they’re usually undervalued.
  • College players should always be preferred over high school drafts because they have played against better players and have longer histories by which to be evaluated.
  • Oakland’s General Manager deliberately would not watch games, so as to avoid bias.
  • Lack of emphasis on player psychology, motivation, and game tactics. Emphasis on player selection, and game/season strategy.
  • Pitchers can only influence hitting through the number of strike outs, home runs, and walks that result. Accordingly, only these statistics should be evaluated when comparing pitchers.
  • Internal marketing study showed that ticket sales were driven by wins rather appearances by specific players. This enabled them to focus exclusively on winning rather than overspending for players as a marketing or financial tactic.
  • Will train players to field, or to improve their hitting power, but won’t attempt to train players how to hit.
  • Hitters without holes (areas of strike zone that are usually thrown as strikes) are undervalued.

Player Arbitrage (Profiting from Pricing Inefficiencies)

  • After determining (via statistics) that a relief pitcher’s number of saves is determined by the inning and count when they are brought in, they deliberately “created” star relief pitchers and then traded them to other teams for undervalued players, draft picks, and funds.
  • After determining that an RBI is determined by the players on base at the time a player comes to bat, they deliberately created “RBI machines” and then traded them to other teams for undervalued players, draft picks, and funds.
  • Hiring injured players that are exceptional hitters because they are mis-priced due to their injury.
  • Hiring older players because they retain their batting skill, even though their speed or number of home runs is dropping.
  • Hiring catchers for their hitting ability with the expectation that their hitting will improve, if given a less strenuous fielding position.
  • Deliberately trading pitchers with a fastball above 90 mph, knowing that this trait is overvalued by other teams.
  • Players are cheaper to hire from other teams at mid-season, after the lowest ranked teams have given up hopes of being competitive and instead focus on reducing their expenses.
  • Hired players with high on base and slugging percentages that were overlooked by other teams.
  • Running speed is overpriced.

Players Valued As The Sum Of Their Individual Skill Sets (Derivatives)

  • Allows valuation of each player skill… fielding ability, hitting, etc. It is then possible to find the cheapest collection of skills.
  • If a player or group of players needs to be replaced, it is possible to find a group of substitutes that will yield similar performance.
  • Hiring players that will soon become free agents because you are automatically given a first round draft pick… which enables you to find talent cheaply, and lock them in for a 7 year contract while still affordable.
  • Permits valuation of even the influence that players have on an opposing team.


Game Theoretic Attitude Toward Batting (Hitting Strategy)

  • Exceptional hitting usually compensates for poor fielding ability.
  • Sacrifice bunts and stolen bases are forbidden.
  • A minimum number of walks are required of players each year, although most other clubs disparage walks.
  • Statistically proved that clutch hitting (where the pressure of a situation affects hitter performance) doesn’t exist.
  • A player who sees more pitches per at bat is more valuable because he exhausts the pitcher, and makes it more likely a relief pitcher will be called in.
  • Batter performance is substantially affected by the count (balls and strikes). Encouraging walks makes a player more likely to achieve a count which makes the pitcher more cautious and batter more confident.

This book could be re-titled An Industrial Engineer’s Views Of Baseball with occasional references to Financial Engineering (specifically, the parts that involved trading players while they were valued incorrectly). While mathematicians have been poring over baseball statistics for decades, it was only recently implemented within professional baseball. It is even more noteworthy that quantitative insights were public knowledge, but no one cared to implement it. Is it any wonder that the first team to do so was able to break the 70 year record for longest consecutive game winning streak (20 games) with one of the smallest salary pools in the game? It is even more noteworthy that this was enabled entirely by two men… the Harvard educated economist, Paul DePodesta and the contrarian General Manager, Billie Bean. The competitive advantage they created enabled them to successfully field an Oakland Athletics team ($40 million dollar salary pool) against the New York Yankees ($140 million salary pool) which could justifiably be said to value the competitive advantage created at $100 million annually.