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.”