Base rate and mean reversion structure

One decision making suggestion is to start with the base rate, to find a set of comparable circumstances and ask, ‘what typically happens?’

In investing it is to find the price of, say Amazon, and ask how often a company of those characteristics grew at an expected percentage. Rather than start with the idea that Amazon is a great company that does a bunch of things well and so on – we can ask, for companies like this how many have grown at 15% a year? Zero.

Another example is (large, but maybe all) construction. The “base rate” is not good, fast, and cheap but overpromised, over-budget, and underwhelming. You cannot compare this to that people protest. Boloney says Bent Flyvbjerg, the cost overruns and benefit shortfalls are so consistent they are comical.

So starting with the base rate can help. What else?

On Wharton Moneyball the hosts discussed the 2020 Olympics and noted that the United States (men especially) have underperformed compared to years past. Is it culture? Training? Commitment?

“Is the U.S. doing badly or are other countries proportionally better?” – Shane Jensen, Wharton Moneyball, August 2021

Yes, says cohost Cade Massey, “Give Shane credit for the most parsimonious explanation we suggest for most any situation, try regression to the mean on for size and see if that can explain it.”

The idea behind regression to the mean is that performance varies up and down. There are many causal explanations for why this happens, think about talking heads for sports or stocks, but sometimes the mechanism is just old fashioned randomness.

But, ugh, we do no like this. Give me a reason man. So we assign reasons, which may be more comfortable than they are accurate.

We can make easier decisions. Easy decisions are designed. What designing a decision does is it shifts the information people use. Simple starter explanations like, the base rate or mean reversion, both create a decision making structure that will often help people get pointed in the right direction first. Start in the ballpark or base rates and then move towards your unique situation. Start with mean reversion as the mechanism and the adjust for other factors.


Mean reversion, said Cliff Aeneas (Bloomberg) is basically value investing, “they’re almost synonymous.”

Three star recruits

The success equation notes that results are combinations of skill and luck. Some parts of life have a larger luck outcome than others.

So, to improve, we look at the skill slice. Poker’s appeal is this idea. Play more hands with positive expected value. But not every sport is as clean as poker. Football, for instance, is messier.

One way to work around the football outcomes is to focus on the football inputs. For instance, recruiting is important, how many highly rated recruits does a coach get each year? That seems like a nice input as the percent of “Blue Chip” recruits correlates well with wins.

Ah, but incentives are tricky.

“There are stories you hear, anecdotal but I’ve heard more than a few, about how different coaches may have a financial incentive to have higher ranked recruiting classes, and they may be involved in the process of lobbying to get guys higher stars.” – Bruce Feldman, Wharton Moneyball, September 2021

Incentives are like the weather. Just like a bunch of measurable aspects (temperature, pressure, wind, humidity) combine to form ‘the weather’, a bunch of measurable aspects of a job combine to form the incentives. A football coach has incentives to win, but also to pay his daughter’s tuition and take his family on vacation. And it’s not just football coaches, it is all of us.

What to do? Work is a combination of financial and non-financial rewards. Alchemy offers a way to tweak the non-financial rewards. Culture works well too, and that comes from the top.


Here’s a story on auto incentives (thanks Stephen!). Incentives were one of my favorite ideas, get all 62 as a daily email drip on Gumroad. Find them on Amazon too.

Hurdling past covid

One way to think about “adoption” is as series of hurdles. If something is “adopted” it has succeeded by crossing the set of hurdles. There are few food bacteria “adoptions” because of hurdle technology: hot, cold, salt, and acid all make the process harder for food bacteria to survive.

Another metaphor for this approach is Swiss cheese: one layer has multiple holes but if the layers are independent, then stacking one on top of another removes the holes.

Part of the problem with studying, treating, and living with Covid is that it’s hard to figure out what works. There are models, but we’re still kinda guessing. As of August 2021, more than one-fifth of all FDA approved drugs were tried as off label treatment for Covid. Ironically, there’s not enough Covid to study it.

“What should give us reason to be hopeful is that there’s this cumulative effect that if you give the right drug at the right time along the way…there are these 15-30% reductions at each step so if you are someone that gets a monoclonal antibody early on, if you get fluvoxamine, you get remdesivir on admission, you get dexamethasone once you are on oxygen. We should model out where this puts you at.” – David Fajgenbaum, Wharton Moneyball, August 2021

Ah not so fast, Eric Bradlow follows up. How independent are these? Is this like a piece of Swiss cheese? “It’s shocking,” says Fajgenbaum, “they all seem to hit it from a different angle.” That angle appears to be time. Vaccines are like sunscreen, David explains, and that’s the pre-infection prevention. Then it’s one drug to stimulate the body’s immune response, then it’s another to slow that response way down.

Abraham Lincoln is attributed as saying, give me an hour to chop down a tree and I will spend the first fifty minutes sharpening an axe. Rather than trees and axes we can ask: Is our situation a hurdle condition? With Mr. Lincoln and the suggestion of Charlie Munger to invert, always invert (!), we can come up with a simple situational:

For deceleration, we want to create a series of independent hurdles an agent must cross. In the case of covid this might mean that a place mandates masks, vaccines, and social distancing — or maybe just be outside.

For acceleration, we want to create fewer hurdles for an agent. If not possible, we want homogenous hurdles. Smartphones did this for ride sharing: the who (payments), where (location), and when (on-demand) were all integrated into an app. Another way to consolidate hurdles is find the JTBD.


Even 17 months into it still feels early to say these are the treatments. While they may not be this approach still feels okay.

Football ’21 favorites or field?

“Between the Chiefs, Bucs, Packers and Bills there’s a fifty percent chance of one of those four teams winning the Super Bowl. In other words, you can have those four teams or the other twenty-eight in the league.” – Cade Massey, Wharton Moneyball, August 2021

Take the other twenty-eight! This idea holds in both sports and investing.

One potential bit of mental muck is what we can call Visibility. It is easy to imagine a specific thing happening rather than a range of things happening. Visibility is part-of-the-reason counterfactuals and postmortems are difficult to conduct. That three of the four quarterbacks have in fact won a Super Bowl makes this effect more so. I can ‘see’ one of these quarterbacks winning the big one, but that doesn’t provide helpful information.

Not so fast though.

What is ‘the field’? As Tim Harford wrote, it is as often the words as the numbers which cause confusion (life expectancy for instance). In the case of the NFL, it’s the twenty-eight other teams that might win the Super Bowl.

But is that right? Can every other team win the Super Bowl? While on “any given Sunday” any team might win, stringing together a group of wins to be champion is far less likely.

The central point to Zeckhauser’s Maxims is that reframing a situation may cause our conclusions to change. We used this framework to ask: Was the Ohio Vaccine Lotta a Good Idea? What if we reframe the question around Super Bowl favorites then?

Roughly speaking there are three groups: the Favorites (4 teams), the Chasers (X), and the No Chancers (Y). Now how many Chasers and No Chancers there are is questionable, but the framing changes our thinking. If this is the structure then the relevant idea isn’t the field but a subset of the field: the Chasers. If there are 4 Favorites, 4 Chasers, and 24 No Chancers then the choice changes. Take the favorites. What if there are 4 Favorites, 8 Chasers, and 20 No Chancers? The top twelve preseason favorites have won 85% of the previous 20 Super Bowls.

There’s no definite answer to this Favorites, Chasers, and No Chancers structure but the framing does change how we think about it.

Another mental model is the same mindset we used “Tracking Tom“. The idea there was that there’s more downward variance than upward variance. The same idea holds for the Bucs, Chiefs, Bills, and Packers: those teams are more likely to underachieve. Put another way, it’s more likely that something goes wrong (someone’s quarterback underperforms) than right. The Chiefs and Bills, for instance, both notably outperformed their 2020 Pythagorean figures.
“Uncertainty is generally underestimated,” said Adi Wyner, “and that means that the field collectively have a little bit more probability than you might assign to four teams.” The data agrees. Take the field.

A confusing life expectancy calculation

“Statisticians are sometimes dismissed as bean counters. The sneering term is misleading as well as unfair. Most of the concepts that matter in policy are not like beans; they are not merely difficult to count, but difficult to define…the truth is more subtle yet in some ways easier: our confusion often lies less in numbers than in words.” – Tim Harford, The Data Detective, 2021

One of Harford’s goals is to help people understand the world more as it is and less as they wish it. Harford kindly covers ideas like base rates, sampling bias, and algorithm associations.

That last one has some quite funny anecdotes. For instance, one AI system was trained to distinguish healthy skin from cancerous skin. Crunching and comparing are two things computers do really well, so this seemed a good fit. And it was! The AI (read: computer code) categorized correctly. But computer code is like a mango slicer – it has a singular use. In the case of the skin cancer, what the AI “learned” was that if a ruler was present it was cancer.

That’s funny.

But also not. One economic principle that’s going to affect (is affect_ing_) work is the idea that as something gets cheaper it’s used more. LEDs and cameras are two recent examples. Data too, is going to be part of our lives more, and Harford wants us to think about the numbers a bit more. For instance, what does “life expectancy” mean?

“They take the relative risk at every age and they integrate it. They ask, if the relative risk this year stayed constant forever, how long would someone born today live? That’s where we lost a year, but that’s assuming Covid stays and the year we just had gets repeated .” – Adi Wyner, Wharton Moneyball, July 2021

This isn’t the only way to calculate life expectancy, but it was the way that lead to headlines like, “US Life Expectancy in 2020 Saw Biggest Drop Since WWII, With Virus Mostly to Blame”. That’s true, but is that how most people understood it? Does if this previous year repeated forever seem like a good conditional?

Most of what happens, and Harford starts his book on this idea, is that we think fast. But we can use this tendency to being more numerate. Books like Harford’s bump up (Bayesian baby) these ideas. Riddles like: most British men live past the average age help too. A steady dose of numeracy uses the availability heuristic for our own good.


Not into the book thing? Harford has great podcast that cover these ideas. Wharton Moneyball is another with more of a sport’s bent. Gambling podcasts too cover these ideas. As Tyler Cowen said, it’s not that these things are VERY IMPORTANT but that if we see them more we update our mental toolboxes so they are marginally more important.

USA Swimming Analytics

The first breakthrough in swimming was imitation. Like with high jump, seeing a new way to do things helped. The second breakthrough was underwater footage. What’s next?

Adi Wyner asked, is there anything beyond video helping with swimming improvements? It’s a good question. Let’s get some sweet advanced analytical fruit from the random forest up in here!

“We don’t have any tools to calculate instantaneous velocity, which would be the most helpful. It (the tool) also can’t be something that burdens the swimmer because if equipment is hanging off of them it changes how they are interacting with the water.” – Russell Mark, USA Swimming, July 2021

It’s the classic question: how do I know what to do?

It could be that baseball was uniquely suited to analytics: lots of data, one-v.-one matchups, less cultural importance (relatively). Swimming, Mark explained, has a lot of different body types and so there’s less data and fewer answers for “what to do”.

But it’s not completely empty. USA swimming for instance hosts the Olympic trials three weeks before the games. The thinking here, explained by Wyner, is that individuals vary in their performance but not too much during this competition window. If variance runs ‘in chunks’ then a proximate trials-games window makes sense. This theory might work, it is showing some alpha erosion as for the 2020 games Australian swimming has copied this schedule.

Luckily most of life is not the Olympics. The greatest athletes in the world looking for improvements “at the margin” is not the model. Most of life is answering questions like a 15 or 30 year mortgage? Most of life is just choosing from the good options, not finding the best one to the nth degree.


It feels odd writing about luck without mentioning The Success Equation by Michael Mauboussin. There we go, it’s mentioned.

Earned or eligible?

“We were trying to motivate vets to take advantage of an education employment benefit that they were entitled to after returning to the United States after their time serving in the military overseas. The office of Veterans Affairs had very little budget and could only send one email to veterans to market this program…We changed just one word in the email. Instead of telling vets they were eligible for the program, we reminded them that they had earned it through their years of service.” – Maya Shankar, Inside the Nudge Unit

Another way: a vaccination dose has been reserved for you.

Behavioral scientists call this the endowment effect, all things being equal we value the thing we have more than the alternative.

Cade Massey observed (2018) this in the NFL. One year a team would refuse to trade down, noting the value of a high draft pick, but the next year refuse to trade up, noting the value of multiple lower picks. All things equal is never quite true so the question is how unequal is this case?

The first step to any problem is admission and articulation. We had a derelict iMac on our kitchen desk for a long time. A few times a year the kids played Roblox and sometimes it streamed music. One day I logged in to the Apple trade-in program and discovered it was worth $240. Click, fill, submit the form and three days later a box showed up. Pack, seal, ship. Ten days on I had an Apple gift card. There’s no way I would spend $240 on an old iMac and so trading it in was an easy exchange.

If that was the whole story.

You see, this was the second time I did this. Almost two years early I did the same thing. Click, fill, submit. The box came, I procrastinated and the return, recycle, and reward never came. Why not? The transaction costs.

The endowment effect is a helpful human habit because it shields the owner from transaction costs. Exchanges have middle-men, asymmetric information, ambiguity, and egos. But words like ‘reserved’ and ‘earned’ reduce some of that mental accounting.


Another way to think about this is to ask is this a compromise or a coin flip??

Alpha erosion and hot dogs?

Wharton Moneyball is a great podcast. The intersection of sports and business doesn’t do justice to the topics covered. Two events Moneyball does not overlook are the Kentucky Derby and Nathan’s Hot Dog Eating Contest.

During the July 2021 episode, co-host Shane Jensen asked if
it’s Joey Chestnut’s technique or some god-given gift that allows him to eat a record seventy-five hot dogs in ten minutes. Eating expert and co-host Eric Bradlow explained :

“They all do the same thing. Eat multiple hot dogs followed by buns dipped in water. Eat multiple hot dogs followed by buns dipped in water. Everybody, since Kobayashi started this strategy in the mid-2000s, uses this strategy.” – @EBradlow, Wharton Moneyball Podcast

Kobayashi’s creativity (and success) invited competitors. Alpha erosion is the idea that valuable advantages degrade with imitation. What was once scarce and valuable, is now abundant and worth less. Daryl Morey said that in the early days of basketball moneyball it was easier to draft players. By 2017 Morey noted how many other team’s draft boards looked a lot like the one in Houston.

But knowing alpha erosion exists and seeing it occur is not fait accompli. There are at least two paths: innovation and restriction.

Innovation occurs when an organization can deliver better products each year as judged by their consumers. Find the JTBD. The capacity for this is dictated by an organization’s culture. Does an organization allow for exploration, does it allow for an Innovator’s Solution. 

Restriction occurs when an organization can gain an advantage by acting in a way the competition cannot. Part-of-the-reason Dollar Shave Club and other DTC companies succeeded was because the distribution advantage of legacy companies was also a weakness. Gillette could not compete (as judged by the consumer) without upsetting the retail partners.

Restriction for an individual is to remove ego, which often opens new paths for competition success. Movie Producer Jason Blum demonstrated the success of the low-budget horror film and hasn’t suffered much alpha erosion. Part-of-the-reason, said Blum, is that people in show business like the rewards of the show part more than the business part. There are huge advantages for a person if they can look stupid.

Shoveling as many hot dogs into your mouth may not seems like a good idea. It’s probably not. But the lessons we get from it sure are tasty.

Inverting Punting Questions

Typical analytic situation have three potentials for improvement (or, competition).

  1. Better data, think motion tracking in football or hockey.
  2. Better models, think the shift from batting average to on-base-percentage.
  3. Better people, think the 1980’s shift when Edward Thorpe began competing with other Ph.D.

However, the largest potential gain in analytics (at least sports, circa 2020) is the implementation. It’s no use coming up with a good idea if you can’t get it into the portfolio.

Richard Sherman and Chris Collinsworth offer a stopgap solution. Talking about the Pittsburgh Steelers decision to punt on fourth and one from the forty-six, “If you’re the Cleveland Browns you’re definitely relieved,” said Sherman, “shoot you only needed a yard, you can fall for a yard on most defenses.”

This idea has been around a long time in sports, Bill Simmons has spoken about it often on his podcast; what does my opponent fear the most? I’ll do that.

Some NFL teams have solved the implementation obstruction with a direct line from the analytics department to the coach. Teams slower to adopt and adapt can take the idea of inversion and just ask one of their coaches. It would be great to see a head coach ask his defensive coordinator if the offense should stay on the field, or indeed if they should punt.

Note, I listened to Thorpe’s A Man for All Markets and while long, it was good particularly because it was read by him!

What you pay: Deals in the NBA

Shane Jensen to Seth Partnow, “you make the decision to be agnostic to contract in your analysis, but as you think about building a team, contracts are something you need to take into account.” Partnow notes:

“If you’re doing an asset value ranking then age and contract come into the decision making process. There’s some players at the very high end you pay whatever: LeBron, Kawhi, Giannis. You pay them whatever because they still outperform that based on the max contract structure. It’s almost literally impossible to overpay those players.

Partnow

The other group that tends to outperform their contract is rookies, again based on contract structures.

This was in the same podcast where the Wharton hosts discussed Tom Brady, who is making more things go right, and appears to be defying the Howard Marks word of warning: “Buying good things can’t be the secret to success in investing. It has to be the price you pay. It’s not what you buy, it’s what you pay. There’s no asset so good it can’t become overpriced.”