Supported by Greenhaven Road Capital, finding value off the beaten path.
If you hadn’t heard, Michael Lewis has a new book out called The Undoing Project. I’m a Lewis fan and enjoyed it. If you’re curious about Lewis and the book, this Slate article, Basketball’s Nerd King – How Daryl Morey used behavioral economics to revolutionize the art of NBA draft picks is a good sample.
I took some notes. Ready?
1/ On certainty. Morey started his career as a consultant. Not because he didn’t want to be involved with sports, he did, that’s why he was a consultant.
His plan was to make a fortune at McKinsey, then buy a team. Ah, the naivety of youth. In Damn Right, Janet Lowenstein writes that Charlie Munger had a similar idea, only as a lawyer instead of a consultant. However, Munger saw in his day-to-day practice was that business owners not business lawyers who generated the real wealth. Munger switched paths.
Morey wasn’t aware of this thinking (yet). He was learning other things.
“From his stint as a consultant he learned something valuable, however,” Lewis writes, “It seemed to him that a big part of a consultant’s job was to feign total certainty about uncertain things.”
McKinsey was billing clients $500K a year and those clients wanted predictions with certainty. They weren’t comfortable with what Phillip Tetlock calls “the wrong side of maybe.” Morey served his clients. They’d ask for an oil forecast and “we would go to our clients and tell them we could predict the price of oil,” Morey said, but “no one can predict the price of oil. It was basically nonsense.”
We want confidence in our predictions. “Confidence is part of a complex (of competence)” that we want in people says Daniel Kahneman. “We want the people that we depend on to be competent and to be confident.”
Nate Silver wrote, “the amount of confidence someone expresses in a prediction is not a good indication of its accuracy—to the contrary, these qualities are often inversely correlated.” This is what Morey felt.
We think confidence follows accuracy like a coal car follows a locomotive. This isn’t so.
2/ Extreme ownership.
“Here’s the biggest reason I want to be in every interview,” said Morey. “If we pick him, and he has some horrible problem and the owner asks, ‘What did he say in the interview when you asked him that question?’ and I go, ‘I never actually spoke to him before we gave him 1.5 million dollars,’ I get fired.”
Morey practices what Jocko Willink calls “extreme ownership.”
3/ That’s interesting. Morey was 15 and the Cleveland Indians were on the cover of Sports Illustrated and predicted to win the World Series.
““I was like, ‘This Is It!!!! The Indians have sucked for years. Now we’re going to win the World Series!’ ”
The Indians finished last.
“The guys they had said were going to be so good were so bad…And that was the moment when I thought: Maybe the experts don’t know what they’re talking about.””
The next year Morey came across The Bill James Historical Abstract. He bought a copy.
These moments, where you go, that’s interesting are moments worth sniffing around a bit more. That’s what Benjamin Graham did when he found information on Northern Pipeline company. Judith Elsea does the same thing, only with an algorithm. Richard Thaler kept a list of stupid things people do.
We get that’s interesting moments from good pattern recognition. We see something, it doesn’t make sense, we dig deeper. And here’s where I disagree with Lewis who writes, “It was bizarre that it was even possible for a total outsider to walk into the game with an entirely new approach to valuing basketball players and see his approach adopted by much of the industry.”
The opposite makes more sense. Only an outsider could come into the game with a new approach that worked. Outsiders succeed all the time. Charles Lindberg flew mail routes in whatever plane was available. In The Outsiders the twist is in the title. John Boyd was a fighter pilot who developed ground warfare strategy.
4/ Measure the right things. Lewis quotes Morey:
“Obviously their performance statistics told you something about them. But which ones? You might believe—many then did—that the most important thing a basketball player did was to score points. That opinion could now be tested: Did an ability to score points in college predict NBA success? No, was the short answer.”
I realized after listening to Chris Cole and reading Dear Chairman by Jeff Gramm that superficial observations can conceal chaotic currents. Cole and Gramm approach this from an investing angle. They’re looking for situations where what we see isn’t what it is.
In basketball this was points. Points looked good. It told you something. It was easy. But to make good choices you needed more. What was the more for Morey? “Almost everything we looked at was nonpredictive.”
Hmm. What to do?
Investors of money like Joel Greenblatt and Warren Buffett would tell you to wait for the right opportunity. Sam Hinkie’s firing in Philadelphia is a data point that tells you how well that works.
What do we do if we don’t know what the right things are? We find the wrong things and eliminate those. The Rockets learned this lesson the hard way when the player evaluators gave Marc Gasol the nickname “Man Boobs.” Whoops!
The problem was a bit of attribution substitution. Rather than answer (the harder) question of, “can Marc Gasol be a good NBA player?” The staff switched to (an easier question) of, “does Marc Gasol look like a good NBA player?”
Not only that, but scouts and coaches would overvalue things because one player was the same race as another. Or a player persuaded them in a meeting (tall guys are particularly charming it turns out). There were many things that did not contribute to the success of a basketball team but the staff acted like it did.
You have to get the MIT right. John Boyd taught fighter pilots how to reverse a position. Ross Perot tried to convince GM the MIT was quality not technology. In personal finance, says Morgan Housel, it’s car, house, and school.
The MIT for a basketball player is not race, “man boobs”, or (only) points scored in a game. There were better things to measure, Morey set out to find those.
5/ Barbell approach.
“So long as it relied almost exclusively on performance statistics, the model would always miss DeAndre Jordan. The only way to see him, it seemed, was with the eyes of an old-fashioned basketball expert. As it happens, Jordan had grown up in Houston under the eyes of Rockets scouts, and one of those scouts had wanted to draft him on the strength of what appeared to him undeniable physical talent. One of his scouts had seen what his model had missed!”
Success would start to come with a barbell approach. Take statistics and scouts and mix them together. Lewis writes, “The trick was to listen to it (Morey’s model) and to the scouts at the same time.”
6/ The two-jar model. I love the two-jar model and it fit perfectly as the theory behind one of Morey’s rules.
When the Rockets had workouts with players the coaches tended to overvalue the things they saw (good and bad). Morey told them to weigh these evaluation sessions “really low.” It was hard for the staff. They saw things and those things meant something.
Or did they?
The two-jar model is a framework to view each outcome as a combination of draws from a skill jar and a luck jar. If a player performs awesome or poorly in his workout what was the reason? The two-jar model suggests we ask how much of the performance was skill based and how much was luck. Morey understood this, Lewis writes, “If a guy was a 90 percent free-throw shooter in college, for instance, it really didn’t matter if he missed six free throws in a row during the private workout.”
Free-throw shooting is mostly a skill draw with very little luck. That’s an outcome that will hold up over time.
7/ Rapid fire. This post could go on forever. Let’s pull a few more quotes.
Finding the truth is not a popularity contest. “Who cares what other people think?” Rockets owner Leslie Alexander told Morey. John Boyd told his compatriots that “getting kicked in the teeth is the reward for good work.”
“Soon Morey noticed something else: A scout watching a player tended to form a near-instant impression, around which all other data tended to organize itself.” Daniel Kahneman suggests we use delayed intuition. “There is a need for disciplined intuition and what I mean by disciplined is delayed intuition. One of the many problems with our intuitions is they come too fast and we tend to confirm them.”
“Confirmation bias is the most insidious because you don’t even realize it is happening,” says Morey. “The normal mind takes out of the noise what it wanted to hear all along,” said Nick Murray.
During a lockout Morey took a class on behavioral economics that made him uneasy after seeing the anchoring effect in action. It can happen for the starters on a team writes Chris Anderson. Managers “wait until the evidence of flagging performance is undeniable. By that time it’s often too late.” Let anchoring help you and start with the base rate.
“You know,” one Rocket executive said, “if we had the pick we’re thinking of trading for and they offered Lowry for it, we wouldn’t even consider it as a possibility.” This was a great example of inversion, one I’ve heard Dave Ramsey use to give financial advice. If your car is worth $8,000 would you buy it if you had no car but eight grand?
Thanks for reading, I’m @mikedariano on Twitter.
The story about Gasol made me laugh out loud. Anyone who’s played pickup basketball has met the big guy who looks overweight, slow, and clumsy and who anything but the last two. At a slim 6’2″ I guarded these guys all the time and they unconditionally kicked my butt.