My latest for the Huffington Post links the stories told in Stumbling on Wins to recent Congressional testimony by Nobel Laureate Robert Solow. My interest in this story is twofold.
First, I wanted to once again emphasize a major story in Stumbling on Wins. What we see with respect to decision-making in sports applies to all of economics. Specifically, the assumption of rationality – so often employed in economics – is inconsistent with what we know about human decision-making. And as Solow emphasizes, the assumption of rationality has an unfortunate impact on the economic advice some macroeconomists offer.
This is not the only reason I was interested in discussing the words of Robert Solow. Currently I am the president of the North American Association of Sports Economists. If you wish to join our group – and if you do you get a subscription to the Journal of Sports Economics (so this is worth it) — you need to fill in a membership form and mail this form (and your $50 membership fee) to John Solow.
Who is John Solow? He is
- the treasurer of the NAASE
- an associate professor of economics at the University of Iowa (and colleague of Stacey Brook — co-author of The Wages of Wins)
- the son of Robert Solow
John was also the Ph.D. advisor of one of my favorite co-authors, Tony Krautmann.* Tony and John are both a bit older than me. Okay, they are both at least 10 years older than me. And when we hang out at the annual meetings, John likes to refer to me as “the young punk.”
This is one of the great things about academia. In September I will be 41 years old. If I were an athlete, I would be considered a very old man (unless I was a bowler or curler). In academia – where I get to study sports – I am still a “young punk.” And that might suggest my best days are ahead of me. Then again, I am a tenured professor. So maybe I am just going to spend the next two or three decades practicing what I will be doing in retirement (i.e. nothing).
– DJ
*- Just to clarify, I have had the pleasure of working with 25 different co-authors. Tony definitely ranks in the top 25 :)
Wages of Wins Journal 
robbieomalley
July 29, 2010
I’ve always thought about this scary idea. If some GM’s clearly have no idea what they are doing, even the one’s with the most money to spend, what is stopping people who make even more important decisions on the national scale from doing the same?
What’s to say Tim Geithner’s decision making capabilities aren’t similar to Isiah Thomas?
arturogalletti
July 29, 2010
Rob,
Typically, real world actions like Isiah Lord Thomas get you hauled up before your shareholders or eaten by the competition but not always. Sadly he’s not the only prominent example of a clearly incompetent public figure who get his position way past his expiration date that I can think of. Practical Incompetence combined with personal charisma with a touch of animal cunning in one man has been the ruin of many an enterprise not just nba teams.
Chicago Tim
July 30, 2010
Rob, I absolutely was thinking about the irrational decisions of the best and brightest on Wall Street and in government when reading Stumbling on Wins. Sports economics is not just about sports. And GMs are not the only irrational decisionmakers. And yes, it is scary. If that isn’t scary enough, now think about the people in charge of the forces of war, and the very real possibility that they don’t know what they are doing either.
some dude
July 30, 2010
Let’s not forget that some of those in power make perfectly rational decisions that are bad for the rest of us.
Rational Decision-Making is not bound by the invisible hand, but rather indifference curves. coughnashequilibriumcough
http://latimesblogs.latimes.com/lanow/2010/07/bell-paid-huge-salaries-residents-paid-huge-tax-bills-records-show.html
^^ at least they were outed…
While rationality is an issue in all forms of economics (even game theorists fail their own games!), the bigger issue is imperfect information. Even just sticking to sports, this is a big issue. There’s stuff even us fans don’t know that might change our minds.
marparker
July 30, 2010
Guys, isn’t that what checks and balances is all about. Some bad decision makers might make it into powerful decisions but they have much less of a chance of making the USA the Clippers.
TBall
July 30, 2010
One of the problems that we encounter when challenging rationality is failing to take into account all of the externalities. It may be that rarely punting is the best way to win a football game. However, if a coach goes for it on 4th down a handful of times every game, he will be questioned by everyone the first time he loses a game. He will risk losing his team, he will risk being called to the mat by the GM and media. Lose two games that way and you risk losing your job and becoming unemployable. It can be rational for a football coach self interests (and, in economics, self interests prevail) to make decisions that are counterproductive to winning.
Fifteen years ago, Dan Duquette kept his statistician in the closet and was mercilessly derided when he went public. In a league that recycles its GMs with aplomb, he is out of baseball. He did not do things the MLB way. A few years ago the Red Sox won their second world series in 4 years (also their second world series in 90 years) and they were lauded for having Bill James advising management (although a gag order seems to be in place around the weight and scope of his involvement). The world changes slowly.
I am not educated in economics, but I have found that if you take what appears at first blush to be an irrational decision, scoff and say it doesn’t make sense, you don’t learn much. If you take that decision, assume the decision-maker made a rational decision, then assign weights and value to the elements behind the decision, the elements at play make far greater sense and you learn more.
People also have differing value systems. Some people value short-term success more than long-term. Some people value media approval over peer approval. Some people are more concerned with not being Bill Buckner than having the chance to be Adam Vinatieri (pardon my Boston bias). Varying values don’t make us irrational. Economics has always recognized that different people have different value systems and, thus, two people given the same options could make different decisions and have both decisions be rational.
Perhaps a cost of peer acceptance is acceding to work with imperfect information. And perhaps peer acceptance is better for job security (re-employability being a key element of job security in the professional sports) than use of perfect information. And perhaps, working with imperfect information and ill-suited value systems doesn’t produce good organizational outcomes. Maybe ESPN thinks highly of Kobe and will only hire statistical journalists that support their view. If considering self interests, and self interest is employment at ESPN, doesn’t that make it irrational to support a statistical system that finds fault in Kobe?
Maybe the question we need to ask is not whether the average GM or coach is a rational decision-maker, but whether the system(s) that creates/selects/judges the decision-makers is inadequate, putting people in charge whose self interests and internal values do not sufficiently support the interests of the organization.
TBall
July 30, 2010
Maybe there should be a word limit on comments.
Italian Stallion
July 30, 2010
I think any worries about the high level economic and business decisions being made by the private sector based on the actions of some NBA GMs and owners is vastly overblown.
Most NBA owners are not only not even experts at basketball, they are clueless about it.
They didn’t rise to the ranks of NBA ownership by building a great CYO team, turning it into a great high school team, then college team, then “D” league team, and then NBA team.
They made loads of money doing something they ARE very good at and then bought an NBA franchise for fun and potential profit. Most are way out of their sphere of competence and as a result make a lot of bad hiring decisions etc…
In the real world a fool and his money are soon parted.
In basketball a fool and his money puts a crappy team on the floor.
Italian Stallion
July 30, 2010
One more point.
I think it’s entirely rational for Wall St to use easy money and credit from the Federal Reserve to promote and contribute to the creation of bubbles in stocks, bonds, commodities, real estate, consumer consumption etc… in a cyclical fashion because the decision makers at these firms can make enormous fortunes on the upside and have only limited downside risk during the bust.
Their own net worth is only at risk to the extent it’s tied up in the firm’s stock. Salaries and cash bonuses are typically extracted.
The net worth of the firm is only at risk to the extent that the Fed does not socialize the risk of loss with back door bailouts via massive money printing, negative real interest rates, etc.. and the Federal Government is willing to allow the company to collapse without providing direct taxpayer bailout capital.
So basically, as moronic and borderline evil as the behavior on Wall St typically is, it’s entirely rational when the monetary authorities provide the fuel for the boom and you are protected on the downside.
Daniel
July 30, 2010
You have a typo in the first sentence of your Huffington post article. You need to change “worse” to “worst” What exactly do editors do these days?
Chicago Tim
July 30, 2010
Italian Stallion
There were some odd incentives involved in the latest crash, and the bailout provides odd incentives in the future, but there was also a huge amount of irrational behavior. After all, if the actors were really rational, they would have followed the lead of John Paulson and made billions of dollars on the crash. Instead, many jobs and fortunes were lost, even if the bailout prevented a complete meltdown.
Furthermore, even if Wall St could be considered rational, it wasn’t rational in the way that Greenspan and the deregulators anticipated. So the theory that Wall St will rationally regulate itself is dead.
TBall
You are right that defying convention carries its own risks. But the dangers of groupthink, of doing the wrong thing, repeatedly, because everyone else is doing it too, is also scary. Maybe in some sense it is rational because of our need to be accepted, but it can lead to disastrous results. It’s very hard to be the buffalo who refuses to run off the cliff with the stampede, but it’s worse to run off the cliff.
arturogalletti
July 30, 2010
All,
This read’s like the comments on WSJ article good job guys.
Tball,
You can be exempt from the word limit. I loved your comment.
Speaking of irrational arguments, I’ve put a new post on the Short Supply of tall people up on my blog. Click my name if interested.
dberri
July 30, 2010
Thanks Daniel. I fixed the typo.
J R Stewart
July 30, 2010
Dave:
I’m one of the original “Jazzbots” writers for the Utah Jazz website, now UtahJazz360.com. If you’re interested, I could analyze the Utah Jazz for you.
I’ve been a Jazz season ticket holder for 28 years, so I’m deeply immersed in the Jazz.
I have a blog on Fes up right now on UtahJazz360.com. (Jazzaholic)
Let me know if you’re interested!
I have no idea where your site is or how to get on it.
I enjoy stats, but I’m not a stat geek, and don’t fully understand the various wins stats, but would like to learn.
Thanks!
J R