Reading time: 5 – 8 minutes

Buzz Bissinger wrote a post for The New Republic yesterday entitled “Against ‘Moneyball’” in which he attempts to make the case that the Moneyball philosophy is not all it was cracked up to be. His lead off argument is the fact that the teams that are currently still standing – the New York Yankees, the Los Angeles Angels, the Philadelphia Phillies, and the Los Angeles Dodgers – spent a combined $528,620,438 on payroll this year. In Bissinger’s mind that proves that the Moneyball philosophy doesn’t work.  Bissinger suggests that the teams still in the game spent a ton of money to get there and spending money is what you need to do to win the big prize. I don’t disagree with him there. However, I do disagree with his implication that Moneyball has failed because getting to the playoffs and the World Series is still seemingly determined by the size of a team’s payroll.

It occurs to me that at this juncture I should take a brief respite from railing on Bissinger’s post to explain to you non-moneyballers out there what the Moneyball philosophy really is. Essentially the Moneyball philosophy suggests that some players are undervalued because baseball teams and scouts aren’t looking at the right stats.  One of the key stats, as used by Billy Beane in Michael Lewis’ book Moneyball, was on base percentage (or OBP). High OBPs meant players got on base. Beane’s argument was simply this: who cares if they get on base because of a hit or a walk? Good point. Beane found payers with high OBP that didn’t have stellar stats elsewhere on their baseball cards and this helped Beane get these players on the cheap. The high OBP then translated into more wins for Beane’s Oakland A’s than if he had targeted players based on overly exploited stats like batting average.

Now, back to Bissinger’s argument.

In his post in the New Republic, Bissinger seems to be arguing that winning overall pennants will be the only thing that shows Moneyball works. Since Beane, for example, has never won a World Series, has only made the playoffs in two of the last seven seasons and has had teams fall under the .500 mark for the past few seasons shows, in Bissinger’s eyes, that Moneyball doesn’t work.

While I appreciate the heart of Bissinger’s argument – that baseball needs something other than Moneyball (perhaps a salary cap) to right its issue with big spending teams always winning – I think he isn’t looking at the right things.

Sure, we can all agree that Beane, with a $62mm payroll, is probably never going to beat the Yankees, who paid out $201.5mm this year. No hidden stat that can save Beane money on players is going to overcome that. However, I am not sure even Beane himself would suggest that he could get the A’s to the promised land on statistical analysis alone.  All he can do is optimize his wins per dollar spent ratio.

I can’t take credit for thinking of this quick metric.  My Dad suggested it after reading Bissinger’s article.  I went ahead and did the quick analysis per my Dad’s suggestion.  Here is is:

As you can see, I ranked the teams by their “cost per win” from the lowest to the highest. I also kept their payroll ranking (1 being the highest) to the left of the team name so it would be somewhat easier to see the correlation (I would have made a nice visualization of this data but I am simply too tired…).

Let’s look at Beane’s A’s. Not too bad: 26/30 in payroll but 8/30 in cost per win.  That means the A’s are being pretty efficient with their dollars and that is all Moneyball can be expected to help with. (That said, they were not as efficient as they could have been. They should have been somewhere around 4 or 5/30 in cost per win.)

Another missing piece from Bissinger’s article is that once certain stats like OBP begin to be picked up by other teams, as it has been, the effectiveness of those stats to find players at a good value diminishes. In economic terms: the market becomes “efficient” and new stats need to be found to create a new advantage for the team that finds them.

Lastly, I should mention that Bissinger’s argument is partly tied up in giving Lewis’ book a hard time for only focusing on the good things that Moneyball did for the A’s while leaving out a lot of the not-so-great players that the Moneyball philosophy dug up.  Let’s be honest, Lewis is a writer trying to come up with an engaging story and to make a point.  Bissinger should probably realize that no one, even Lewis himself, really expected “Moneyball” to be academically rigorous.

At the end of the day I think Bissinger may just be fed up with the ridiculous uncapped salary situation in Major League Baseball (I am with him there) and he decided to take that frustration out on Moneyball. However, his tough stance on Moneyball is unwarranted. The Moneyball philosophy was never meant to make a small payroll team into a World Series Champion nor did anyone in their right mind think it ever would. It was simply meant to keep the teams that can’t spend the big bucks at least somewhat competitive and it seems to be doing just that.

Side note: I absolutely think the MLB needs a salary cap and fast. The fact that the MLB doesn’t have one is simply ridiculous and it is causing the game to become less fun with each passing year.  Contrast that with the NFL where any team can win on any given Sunday. That is a much more compelling proposition to fans across the country. I mean really, if you are an Oakland A’s fan, why do you even bother getting excited on opening day knowing that you don’t have a chance of winning a pennant? That’s a big problem for the MLB and it will come to a head sooner or later.

Reading time: 3 – 5 minutes

I have seen a lot of talk both in my circle of friends and in the social and mainstream media circles about the space program.  Some of the talk focused on the large price tag that comes with a focus on the space program.  These people generally come to the conclusion that the money spent on the space program could do more good elsewhere.

This seems like a very valid point, especially in this day in age.  We’re in a decent size recession and there are a significant number of people around the world suffering.  Why in heck should we be funding a trip to the moon?  After all, it is a place we’ve already been!  I believe this viewpoint is very shortsighted though.  Here’s why.

First, the space program has either created or significantly pushed forward technologies that are crucial to our economy.  One of the most well known would be the semiconductor.  The space program was one of the influences that pushed the semiconductor forward and now the semiconductor, and things based upon it (i.e. computers, software, etc.), make up a huge chunk of our economy. The space program also created the technology at the base of:

• Cordless power tools
• Smoke detectors
• Home insulation
• Lasers (for surgery, etc.)
• LEDs
• Pill Sized Transmitters
• Camera on a chip
• Body imaging
• Oil spill control
• Alternative food production methods
• Firefighter breathing system
• Jaws of life
• Global communications
• Historical document and painting protection
• and many more…

Second, the human need to explore should not be pushed aside. Exploring new frontiers is in our genes and we should continue to push the boundaries.  I am not sure a world where humans were not continuing to explore would be a healthy place for any of us.  Along the same lines I think the exploration of space does a lot of good for the world from the standpoint of giving us perspective (for more on that see my post on Sagan’s Blue Dot).

Third, and my last point, I think suggesting that the space exploration budget could be better spent is only partly true.  Could the money be given out to people who need shelter, food and other human essentials.  Potentially.  However, I don’t think handouts are what we need.  If microfinance has shown us anything it is that the poor can help themselves by creating businesses and these businesses are sustainable.  Handouts aren’t sustainable.  Do we need handouts for some things, sure, but I don’t think the difference that would be made by diverting the space exploration budget elsewhere would be as big as people think.

I am curious to hear what you all think about this.  It is certainly a debate that splits the country and one that I am sure will be argued for quite some time.

Bonus point (my 4th point): space exploration inspires future scientists to be scientists.  I am sure there are a number of scientists who have done a lot of good for the world that were inspired to dedicate their lives to science because of the space program (although I don’t have any data for this).

Addendum (9.23.09)

After re-reading this post a number of times it occured to me that I did not touch on a crucial issue in this post. I do think that NASA is very inefficient. That said, perhaps the funding that goes to the space program, specifically the manned missions piece of the program, should be pushed out to private sector entities (like Space-X) that do the job better, faster and cheaper.

The function that NASA does really well, and that we should continue to fund indefinitely, is scientific research. They have those processes down to a science (hahaha). Manned space flight, however, is another story.

Reading time: 1 – 2 minutes

I heard someone make a point on Chicago Public Radio’s 848 tonight that I thought was worth repeating.  The thought was this:

Sometimes scientists and artists are too busy looking for the next discovery or the next breakthrough to enjoy where they are right now.

I think that statement also applies to entrepreneurs.  I know I am guilty of constantly thinking of what’s next when I should be focusing on, and enjoying, what is happening right now.

Working on TransFS has helped me regain my focus on the now and the future up to a few years out.  I think this focus is healthy and it is helping me to follow the very Buddhist path of focusing on the process, not the end result.

There is certainly a healthy balance between thinking about what’s next and thinking about what is happening “now” that we should all try to find.  Going too far in one direction or the other just isn’t healthy nor is it going to help one reach their full potential.

Reading time: < 1 minute

I just committed an update to the Estimated Reading Time plugin I developed for wordpress back in February.  This update solves the feed problem that Rick Klau pointed out (thanks Rick!) in that it also appends the reading time information to the feed content.

Callum Macdonald came up with the fix and sent it over to me yesterday (thanks Callum!).  Gotta love the worldwide web where people who don’t even know each other can find each other and collaborate to make better software.

You can grab the updated version of the plugin at its page on wordpress.org any time. If you find any issues with it please let me know.

Reading time: 1 – 2 minutes

It was about time I automated the “reading time” info that I put at the beginning of all my posts.  Today I whipped up a little wordpress plugin that will add the reading time to the top of any post on any wordpress blog.  Now anyone can add that useful bit of information to their posts.

If you are up for giving the plugin a go please download it and send feedback my way.

Regarding the estimation of reading time: I used 150 words per minute (slightly below average) and 250 words per minute (slightly above average) as the range.  I would love any feedback on whether or not the estimation needs to be augmented.

Updates to come:

• Options dashboard: will allow for changes in words per minute numbers.
• Posting data to the feed: need to figure out how to, if possible, get the reading time data into the feed.

Reading time: 3 – 4 minutes

The Pale Blue Dot: Earth

More words of wisdom from Carl Sagan this week.  I have been thinking a lot about Sagan’s work and his thoughts about life on earth and in other places lately.  I rediscovered his work a few months ago and it couldn’t have been a better time to do so.  With the economic crisis in full effect and a number of other crises of varying degrees going on in the world I needed to get some higher level perspective on things.

Like Sagan, I find that learning more about the Cosmos and astronomy gives one the high level perspective they need.

Take a look at the picture above. See the pale blue dot in the middle?  That’s Earth.

The shot was taken by the Voyager 1 spacecraft on February 14th 1990, almost 20 years ago today and about 12 years after Voyager 1 left Earth. The distance from Voyager to Earth when the photo was snapped was about 3.7 billion miles.  The photo was snapped at the insistence of Sagan who presumably thought it would help all of us gain some perspective, given that the “earthrise” photo from the Apollo missions decades earlier did just that.

Six years later in 1996 Sagan related his thoughts on the deeper meaning of the photograph for a commencement address.  Here are his thoughts:

Look again at that dot. That’s here. That’s home. That’s us. On it everyone you love, everyone you know, everyone you ever heard of, every human being who ever was, lived out their lives. The aggregate of our joy and suffering, thousands of confident religions, ideologies, and economic doctrines, every hunter and forager, every hero and coward, every creator and destroyer of civilization, every king and peasant, every young couple in love, every mother and father, hopeful child, inventor and explorer, every teacher of morals, every corrupt politician, every ‘superstar,’ every ‘supreme leader’, every saint and sinner in the history of our species lived there – on a mote of dust suspended in a sunbeam.

The Earth is a very small stage in a vast cosmic arena. Think of the rivers of blood spilled by all those generals and emperors so that, in glory and triumph, they could become the momentary masters of a fraction of a dot. Think of the endless cruelties visited by the inhabitants of one corner of this pixel on the scarcely distinguishable inhabitants of some other corner, how frequent their misunderstandings, how eager they are to kill one another, how fervent their hatreds.

Our posturings, our imagined self-importance, the delusion that we have some privileged position in the Universe, are challenged by this point of pale light. Our planet is a lonely speck in the great enveloping cosmic dark. In our obscurity, in all this vastness, there is no hint that help will come from elsewhere to save us from ourselves.

The Earth is the only world known so far to harbor life. There is nowhere else, at least in the near future, to which our species could migrate. Visit, yes. Settle, not yet. Like it or not, for the moment the Earth is where we make our stand.

It has been said that astronomy is a humbling and character-building experience. There is perhaps no better demonstration of the folly of human conceits than this distant image of our tiny world. To me, it underscores our responsibility to deal more kindly with one another, and to preserve and cherish the pale blue dot, the only home we’ve ever known.

Reading time: 3 – 5 minutes

Being a long time student of finance (starting digging into the markets at the age of 13) I have been particularly interested in the financial crisis that we are in the midst of.  I have been thinking through why something as large as this crisis happens.  Of course, for something so large and complex, there are a number of things that had to come into play to create the scenario but one macro theme in particular leaped out at me.

The theme I am talking about is removing faces from finance.

What do I mean by that?  My thinking is this: once you remove relationships from financial transactions and instruments things start to get messy.

If you are once removed, for example when you buy the stock of a company that you don’t have any personal relationship with, you are probably OK and you hope that the management is giving you quality data to asses.  There’s trust there.  However, when you get further and further away from a face to face relationship with, say, derivatives like CDOs, things simply get out of hand.

I have never been a fan of derivatives and other “abstract” financial instruments.  I always found it odd that no one really knew what the underlying assets were.  Was it Joe’s house, Acme Corp., both? To the creators and traders of these securities it was just paper (digital “paper”) with an assigned value.

I am not the only one who was worried about the issues that could be caused by abstracting finance.  Warren Buffett was worried too.  He once referred to derivatives as “financial weapons of mass destruction.”  Buffett also referred to derivatives this way:

“There is an electronic herd of people around the world managing an amazing amount of money who make decisions based on minute-by-minute stimuli,” said Mr. Buffett, adding, “I think it’s a fool’s game.”

His partner Charlie Munger was also not a fan.  Munger once said:

“The accounting being deficient enormously contributes to the risk,” said Munger, lamenting that executives and shareholders were getting paid on “profits that don’t exist.”

Exactly. Profits that don’t exist and assets no one really understands or can put a face to is a recipe for disaster.

At this point I should note that when I say face to face I don’t necessarily mean it literally.  I am more or less referring to the relationship one has with an asset and how close they are to it.  That being said, let’s take a look at the banks.  I will keep it short since I all of you already know what I am going to say.

Banks, given the market’s appetite for CDOs, were able to grant loans and then immediately get rid of them to someone who would package them up and send them off to a big bank like Merril Lynch who would then create CDOs, etc. etc.  Do you see the issue here?

A bank’s business is to take in money in the form of savings and distribute it (and thus take on risk) in the form of loans on which they make their interest (i.e. their profit).  Normally the banks have to look someone in the eye and really figure out if the person will pay the bank back since the bank is stuck with a bad loan if the person doesn’t pay.  The loan default is the bank’s risk.

With CDOs the bank can make a loan and immediately offload their risk (although as we saw a lot of banks didn’t offload the risk fast enough).  Now, as you can see, the bank isn’t incented to look at borrowers as closely.  They are incented to give as many loans as they can and then ship them out the door.  That is when finance becomes faceless, and also “risk-less” for one party, and when one persons transaction is viewed as risk-less the outlook becomes bleak since nothing is really inherently risk-less (just like there is no such thing as a free lunch).

We need to get back to face to face finance where people make deals with people they know and trust and they have to since they have to hold that risk.  We should really think twice the next time we try to abstract finance and create derivatives.  While cool and intereting to finance wonks creating derivatives is probably not a good practice nor does it create long term value for society.