Supported by Greenhaven Road Capital, finding value off the beaten path.
At last Cade Massey was the interviewee rather than the interviewer. The podcast he co-hosts, Wharton Moneyball, is a lively discussion of sports analytics and a show we’ve covered before. These notes and quotes are from Massey’s appearance on Bet the Process.
In addition to being a Wharton professor, Massey consults with teams, mostly in the NFL. His initial research was a 2005 paper, Overconfidence vs. Market Efficiency in the National Football League authored with Richard Thaler. Massey now consults with teams because, “They want fresh eyes looking at things but they also want a bridge to what’s going on in other industries, what are best practices, what’s going on in other sports, what’s happening in the academic world.”
Teams want out of sample tests. Teams are looking for Ray Dalio‘s investment rule; “that it has to be timeless and universal.”
The smarter football teams have read The Success Equation. In that book, Michael Mauboussin writes about a continuum of luck and skill. Some actions, like chess, are more skill based. Some actions, like football, have more luck based. The luck and skill balance should influence decision making one way or another.
Sand enters our decision-making gears when we think we know something we don’t. Massey said, “Teams are too sure they know who is going to be good.”
“Teams put too much value in the top picks of the draft. Every year it feels like those guys aren’t just can’t miss but probable Hall of Famers…Every two years they’re talking about someone being a generational player.”
Teams violate Charlie Munger‘s iron rule of life, “that only 20% of the people can be in the top fifth.”
Instead, teams should pit historical data against player evaluations. But this is tricky. “Usually when people say they are ninety percent confident they are right fifty percent of the time.”
Take the Cleveland Browns. With two of the top four picks, Cleveland selected a quarterback and cornerback. Cleveland’s staff had a high degree of certainty about those picks. But consider a hypothetical trade, the sixth pick for the sixteenth and a few later ones.
“Teams don’t think enough in bundles. It’s not the sixteenth pick versus the sixth pick. It’s the sixteenth pick and a few other picks versus the sixth alone. You’re choosing one vivid, supposedly Hall of Fame player, versus three solid other players. It’s hard to keep that in mind, mostly they’re thinking about one vivid guy versus some vague possibilities.”
Layered on this decision-making quagmire is the vividness tendency. We like simple and obvious things. Ambiguity is like a puzzle piece that doesn’t immediately fit and as such we toss it out.
Instead, the Browns could have traded back.
“I’ve worked with an organization who had a philosophy of always picking up a future pick…it’s the surest return of the draft.”
Of course, trading back carries some risk.
“What you see (trading back) is that some teams are more comfortable doing those things. They’re going to take a little bit of risk and in exchange for their risk they’re going to get a little premium…if you can do that philosophically the numbers are in your favor.”
Risk is fine, so long as you’re compensated. Chris Douvos recalled David Swensen telling him, “Risk is not itself a dirty word. There are two kinds of risk, there are risks you can mitigate and there are risks that you can’t. The ones you can mitigate you want to spend all your time mitigating and diversifying them and the risks you can’t mitigate you want to make sure you get compensated adequately for.”
Trading back has the highest expected value on average but that doesn’t mean it always works.
“You have to have that philosophy and know that sometimes it’s not going to work out.”
Leaders must shoulder the shit umbrella.
Being on the wrong side of maybe requires top-down support for what’s happening on the field. Coaches like Bill Belichick get the benefit of the doubt whereas other coaches do not. Scout Jason Licht told this story about working for Belichick and the Patriots:
“If I said a guy was a first-round pick, the Colts picked him, and he turned out to be a bust, they (Belichick and Pioli) wouldn’t have looked down on me. They wouldn’t have said I was a bad grader. Because that player in the Patriots system might have been successful.”
Massey explained, “That is what separates the best teams from the teams that aren’t run that way and that’s the root of all these issues. You need owners who will stand in the fray and handle the flack and keep a long-term perspective.”
Belichick was focused on the process not, the outcome. If the process is the steak, managers must also sell the sizzle. This was part of Sam Hinkie‘s problem – ironically so. Massey recalled:
“I remember Sam Hinkie talking about how he conveys information to the organization. Back when he was working for Daryl Morey as assistant GM of the Rockets, Sam would give information to his head coach one way, to Daryl in a different way, to the players in a third way altogether. You’re going to be dramatically more effective as an analyst if you can communicate in different ways tailored to the audience.”
The piece Hinkie lacked was how to communicate with the media and fans. Jeff Luhnow was interviewed by Massey for the Wharton show and he noted all the different people a general manager is accountable to.
“I think it’s important in our position we spend the requisite amount of time managing the stakeholders; the fans, the media, the influencers in the organization, the ownership – all of those stakeholders. I spend a large part of my job managing those stakeholders. It all comes down to communication.”
Money managers face this too. Joel Greenblatt told Barry Ritholtz, “My investors were great but maybe they wouldn’t be so kind when that (a 20% loss) happened, and it did seem to happen every two or three years.”
Besides overconfidence and under communication teams also have to align incentives. “The fundamental issue is that the general manager has a shorter term focus than the owner,” which is, “A classical principal-agent problem with a difference in time preferences.”
When Bet the Process cohost, Jeff Ma suggests a ten-year performance bonus, even if the manager or coach isn’t with the team, Massey calls it “A great idea.” Anson Dorrance had this idea too. He suggested that any board member who votes for a coach should lose their board seat if the coach gets fired. The board members kindly passed on this idea. Nassim Taleb, we will note, was not involved.
At the SSAC in 2017, Massey hosted the “Moneymind: Overcoming Cognitive Bias” panel. There, Farhan Zaidi explained his regret minimization technique. When his scouts were worried about being proven wrong on a trade, Zaidi said: “‘What if instead of making this trade we took him out back and shot him?’ and everyone said to make the trade.”
Massey said regret bias is “a major issue in decision making, and probably even stronger in sports where it’s public.” Billy Beane opined to Michael Lewis that baseball managers faced second-guessing from anyone who had played.
Thanks for reading. We’ve only hit the big decision-making points in these notes. In the podcast, Massey, Ma, and Rufus Peabody add nuance to the conditions.