Frequent WoW Journal contributor, Steve Walters, wrote a fascinating column on optimism bias for the July 26 edition of the Baltimore Examiner. The column, entitled “Optimistic to a fault” can be accessed by clicking on the link. Or you can just keep reading. The Baltimore Examiner has graciously allowed us to reprint the column below:
If you’re an Orioles fan, you’re probably disappointed, angry, or both. Our beloved Birds are stumbling through their tenth straight losing season and, once again, are out of the pennant race before it’s half over.
So owner Peter Angelos showed manager Sam Perlozzo out one door while ushering former Cubs executive Andy MacPhail in another. The hiring of Mr. MacPhail as chief operating officer puts incumbent execs Mike Flanagan and Jim Duquette on notice they’ll go next if things don’t improve soon.
This is standard procedure in business as well as sports (as if there’s a difference these days). When hopes are dashed thanks to decisions gone wrong, it’s customary to cashier the people who made those decisions.
But let’s move beyond finger-pointing. Instead, let’s ask if there’s anything to learn from the way the Orioles made some regrettable decisions; let’s see if there’s a lesson in this season’s meltdown that might be useful even beyond the baseball diamond.
I submit one exists. Specifically, many of this team’s flaws result from a very common but powerful bias afflicting those who picked the talent and decided how it would be used.
This bias has nothing to do with racism, ageism, or the usual forms of prejudice. The technical term for it, among psychologists and economists, is “optimism bias,” and it refers to our tendency to make certain hard decisions as if wearing rose-colored glasses.
More precisely, optimism bias leads us to give greater weight to positive bits of information when we make decisions, and to under-estimate the importance of negative bits. In effect, the world is full of ups and downs, and it’s natural to emphasize the ups and soft-pedal the downs. In high finance, in baseball, and in life, however, you’ve got to resist that urge.
If you’re picking stocks, for example, you obviously shouldn’t look just at a company’s profitable years in projecting its future, but at the entire record. And in personnel decisions, you’ve got to consider a person’s bad days as well as good ones.
Take the Orioles bullpen (please!). Last year it was a disaster, so over the winter the O’s spent $41.5 million to acquire three established relief pitchers-Danys Baez, Jamie Walker, and Chad Bradford-to solve that problem.
Except that “established reliever’ is an oxymoron. Most relief pitchers’ careers resemble roller-coaster rides. Their stats are dependably erratic, commonly fluctuating widely from year to year. Mr. Baez, for example, recorded 41 saves and a 2.86 ERA (for earned run average, or earned runs allowed per nine innings pitched) in 2005, but collapsed to nine saves and a 4.53 ERA the following season. The Orioles’ were seduced by Mr. Baez’s best years, hoped that they represented his real skill level, and made a $19 million mistake. He posted no wins, four losses, and a stratospheric ERA of 6.52 before heading to the disabled list this season.
What’s worse, the O’s accumulated quite a few players like Mr. Baez-useful during their ups, season-wreckers during their frequent downs.
But this is a very common human error. Economist John Burger and I have researched the baseball labor market, and (in a paper that will soon appear in the Southern Economics Journal) found that teams, on average, under-value consistency and over-value players who produce eye-catching but rare “big years,” resulting in considerable red ink.
But don’t we all know people who regularly fall prey to optimism bias in making financial decisions or forming relationships? A friend who lost a bundle in the tech stock bubble (or, more recently, the real estate bubble)? A relative who married someone who was the life of the party on good days but a major pain on bad ones?
All of which is cold comfort to long-suffering O’s fans. We don’t want the people who run such an important enterprise to have the same biases we do. We need them to be smarter than that.
Steve Walters teaches sports economics at Loyola College in Maryland and has served as a consultant to two big-league teams.
Wages of Wins Journal 
tangotiger
June 27, 2007
Steve, is that journal available via Proquest? If not, how can guys like me see it?
I wouldn’t be surprised that the optimism is not only based on a single year, but a single stat, like HR, W, or SV. Baez was one of the worst signing of the FA season at the time it was announced. It doesn’t matter how often we tell GMs “I told you so”, because the corollary to the optimism in signing someone one, is remembering the good signings, and thinking that the bad signings were unlucky. That is, they’ll never accept they were lucky on the good signings, but are quick to accept the bad luck on the ones that don’t work out. These guys will go to Vegas, lose 10K one day, win 8K the next day, and announce how they won 8K and were a bit unlucky otherwise.
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Dave: your comments are impossible to fill. They run off to the right, underneath the visible portion of the screen. This is, unfortunately, not the first time I’ve seen something like this in a wordpress blog.
The second line of the previous paragraph is “to the right”, and the last visible portion of the first line is “to fill. T”. Everything in-between is not visible. I’m typing in notepad, and cut/pasting.
Steve Walters
June 29, 2007
Tango (or anybody else who’s interested): If you drop me an e-mail at swalters@loyola.edu, I can forward a copy of the forthcoming SEJ paper along.
I agree wholeheartedly about remembering the good and disregarding the bad FA signings. One thing we reported in that paper is that there’s no apparent learning in MLB. Teams have been at this FA thing for quite a while, but we found no discernible trend toward avoiding Baez-type mistakes. Someday, it might be fun to test whether that’s true for individual executives, which we did not do. Even rats can learn…
tangotiger
June 29, 2007
Steve, when Vlad was a free agent, one likely destination for him was the Mets. He eventually signed with the Angels for 5/75 guaranteed, and the Mets had offered something like a 5/70 deal, with only half of the money guaranteed. They were afraid of his back.
Fred Wilpon was on WFAN explaining his rational to the hosts by saying that:
– it was a good offer, and if he stayed healthy, he’d get all his money
– they learned from the Mo Vaughn situation
They really didn’t learn anything. They think they may have, but then one year later, they signed Pedro Martinez to a 4 yr guaranteed deal. And then Beltran to a 7-yr guaranteed deal.
Baseball execs are just like corporate execs. They will rationalize everything. My favorite moment at my work was when they had to figure out whether to do the annual evaluation at the same time for everyone in the company (say Nov 1 – Nov 30 for everyone), or split in quarterly chunks based on when you were hired. And they had to decide between these two reasons:
1. “It would be GREAT if we choose the first option, since we’d get to focus on all the reviews at the same time”.
2. “It would be TERRIBLE if we choose the first option, since we’d have to focus on all the reviews at the same time”.
Basically, fill in the blanks with whatever adjective you want.
Phil Birnbaum
July 2, 2007
Could this just be a case of Winner’s Curse?
Suppose Player X has a great year in 2006, and a mediocre one in 2007. The Yankees figure he’s got a 30% chance of reverting to form, and a 70% chance of staying mediocre. The Brewers figure it’s 50-50. The Dodgers scouts say it’s 70-30. All three teams think their estimates are unbiased. And the wisdom of crowds is correct — the “real” chance, known only to God, is the average of the three scouts guesses — 50%.
Of course, the Dodgers win the bidding. But it wasn’t because they were overoptimistic, just that they were wrong …