My grandson Tucker just turned 5. He’s on his first baseball team, the Woodstock Tigers in Connecticutt — 3,000 miles and at least 10 years from the Oakland A’s. The Oakland A’s have one of the lowest salaries of the major league teams, but from 1998 – 2011 the A’s have ranked among the highest in average win rates because of an analytical strategy perfected by General Manager Billy Beane and his Assistant GM Paul DePodesta, called the Moneyball methodology.
Tucker is a bit short for his age and somewhat stocky for a 5-year-old, but he was practically born with a ball in his hand. He’s not a powerhouse at bat, but he’s a basehitter. (Not a lot of grandslams in T-ball.) Even for a 5-year-old, Tucker’s stats are typical of those that Beane is looking for, but atypical of those most sought after in baseball. Traditional scouts want long legs, strong pitchers or homerun hitters, but Beane needs undervalued players who get on base and play good most of the time.
Today, Beane is showing executives at the SAS Financial Services Executive Summit how his methodology applies to risk in the financial services industry. His unusual methodology is documented in Michael Lewis’ 2003 best-selling book Moneyball: The Art of Winning an Unfair Game. You may have also seen Brad Pitt’s characterization of Beane in the onscreen version of Moneyball. Beane says the data is out there – just as it was for the A’s – executives just have to trust the math.
Take a different view
Around 2002, the Oakland A’s found that their payroll was essentially going to flat line while other major league team salaries would continue to soar. Faced with that reality, the owners and managers knew they were going to have to do things differently if they were to continue to compete. Beane decided to look at the traditional data differently. “The great thing about baseball is that everything is very measureable,” says Beane. “We really had no choice – the risk was doing nothing or doing it the same way.”
Beane, once a league player himself and a former actuary, became the A’s General Manager at the end of the 1997 season. According to Beane, it had taken 10 years for he and the league to realize that he was not a great player. But during all of that time, the league was paying him a great salary. Beane was now GM with many potential “not great players” on the roster. So, he decided to hire an Assistant GM who had no background in baseball. Someone with no bias to look at the data differently.
Beane hired Paul DePodesta, a Harvard graduate who would have had a brilliant future on Wall Street. According to Beane, DePodesta loves sports – and data. He believes in math. “If you trust the math, it will work,” Beane quoted DePodesta.
According to Beane, there are more than 162 games in a season, so you have enough data to predict some things. DePodesta looked at the data and showed where changes could be made in draft picks and traditional play options. “The great thing about baseball: you have no greater than a 15% chance of getting to the playoffs. From there, luck can come into play,” says Beane. “There is an optimum amount that a team should spend, and then above that it doesn’t make sense.”
Trust the data
The data has always been there, but people hadn’t been looking at it the way that Beane and DePodesta did. So, every night, DePodesta put the data in and calculated the risks of giving away a run and an out. Analyzing this data and giving each instance a point value let Beane and DePodesta learn how to call the game – this meant more wins. They learned that bunting away – although intuitively correct – was statistically wrong, so they didn’t do it. They traded away high-cost pitchers for those at a lower-price with stats that were nearly as good.
“For us, because of where we were, we needed to spread our chips on one side of the table. We said we are going to put all of our chips onto the one type of player – the skill – who has the most relevance to winning: hitting,” said Beane. “There was a very strong correlation between the team’s getting onbase percentage and winning.”
Using this strategy, the A’s have compiled an 1132-972 (.532) record over the last 13 seasons – the fourth best record in the American League and sixth-best in all of baseball during that time. The A’s have won four American League West titles and secured one AL Wild Card spot during that span, and his teams have posted 90 or more wins in six of the last 12 years.
Beane once again came back to his premise - the higher-priced players were perceived to have higher immediate value and the lower-priced players were perceived to have lower value (They had inherent risks: age, injury, perceived talent.). Beane and DePodesta analyzed the risk of these players differently than had ever been done before – partly because of Beane’s actuarial background. This risk assessment is what has created such a strong ROI for the past 13 years and what helps translate the idea across industries.