MBA: October 2007 Archives
But let's talk about the real dream job. This is easy; I want to manage an NBA team. I know, I know, we're all armchair quarterbacks and Monday-morning point guards. But here's the thing: the NBA is an investor's dream. It's an inefficient market in which the vast majority of investors haven't figured out where the inefficiencies are. We're talking baseball before Billy Beane came along and Michael Lewis wrote Moneyball. Or poker before forums like TwoPlusTwo came along (I know that both of those markets are still very inefficient, but baseball managers have learned to value OPS more highly than they did in 1998. Having guys like Theo Epstein manage the Sox has certainly driven up the market price for players who walk a lot, and the popularity of sabermetrics has decreased Beane's ability to rob all the other GMs blind. Similarly, even if you're a winning poker player today, don't tell me you wouldn't love to be back on Party Poker in 1999, before all the limit pros migrated to No Limit Hold'em).
Anyway, back to my dream job. See, the best part is, I don't have to crack this nut. Guys like David Berri, Martin Schmidt and Stacey Brooks have figured this market out. In The Wages of Wins, they pretty much give away the secret (hint: it's not how many points you score, it's how efficiently you score). But it looks like no one is listening. It's just like baseball, when journalists around the league (many of whom were ex-players) ridiculed Billy Bean for drafting chunky guys who hit .270 and walked a lot over beefy sprinters who hit .330. The mainstream press is still convinced that Kobe is better than Dirk because of those intangibles ("Kobe is a proven playoff closer", "Kobe isn't afraid to take over a game"), and they still blame Dirk for the Mavericks' loss to the warriors, even though the fact that Erick Dampier sat so damn much probably had a more to do with that (yes, that's right, he ranked 4th in wins produced for the Mavericks last season).
In the draft, they make similar mistakes. NBA pundits are in love with potential. Billy King gets praised for picking Thaddeus Young when he could have picked Al Thornton:
There is no question Thornton should have a much better rookie year than Young, but the pick was made for the future. For what it's worth, Young has the chance to be a good NBA player, but it likely won't happen this year.This is a symptomatic thing. Young might not be a very good example, because he was a pretty good college player already; it's not like he's a pure "project". But the fact that Thornton was tearing up pre-season ball scoring 17ppg on 48% shooting and getting 5 boards a game should tell you that Thornton is practically a lock to be a success in the NBA. Given how hard it is to draft a successful pro, passing on Thornton for "potential" is a huge risk. And any finance guy should tell you that $1 today is better than $1 next year, unless you live in a deflationary economy. And since winning translates directly to dollars, and having good players leads to winning, having a good player now is better than having a player who might be good in three years, and might play for you when he starts to get good.
In other words, NBA managers, practically all ex-players, and the press, don't evaluate players efficiently. They tend to value scoring more than FG%, they weigh "intangibles" far too heavily (thinking that Kobe is better than Dirk or KG because he "has that killer instinct" is just silly), and they are in love with "potential". They also tend to believe that the things a player does is more important than the things they do NOT do: driving to the lane, stopping, turning and hitting a tough fade-away shot gets you a spot the highlight reel (yet none of the misses do), while playing within the team offense and avoiding low-percentage shots (helloooooooo Tim Duncan! How ya doin' KG?) doesn't. Getting a steal gets you a lot of praise, while not tuning the ball over pretty much just gets you yawns (and don't worry Gilbert, leading the league in TOs won't keep you from getting a max contract).
Thing is, NBA owners are businessmen. Most of them have MBAs. They know how valuable it is to figure out an inefficient market. I know some of them are more interested in making money than they are in winning. Why hasn't even one of them pounced on this? Why hasn't some person from the school of WoW approached pitched this to an owner? "I bet you could field a very competitive team for $10million less than the salary cap. That's $10 million you save, PLUS $10 million in luxury tax you get from all those teams over the cap!" Why hasn't anyone managed to convince one of the stingier owners to give them a shot? Believe me, I've sent letters. I'd do the job for $100k a year. Shockingly, my resume full of tech jobs and a brief stint coaching women's ball in Europe hasn't gotten me any return phone calls.
As food for thought, the top ten overpaid players, according to Dave Berri. And here are the top ten "exploited" players.
And here's a (free) tip for Danny Ainge. The market is currently undervaluing one player by a TON. You got lucky with James Posey. Now give Motumbo a job.
I chose the title of this blog because two of my hobbies are poker and economics. In both fields, "expected value" is an important concept (I'm fudging here; it's very important in poker, and also well known. It's also pretty well understood in finance, game theory, and other business sciences, not all of which you would label "economics"). I suspect that for anyone wandering by this blog will be a collection of amusing ramblings and angry rants, but I hope that every once in a while a pleasantly useful (erm, valuable) piece of information might hop along.
I'm doing an MBA. In class today a great example of how business and poker are really the same thing Came up. Assume a random manufacturing company has costs for a project of $250000. They are considering how much to bet (um, sorry, bid) on the project.
| Bid | Winning Chance | Profit* | Expected Value |
| $600000 | 5% | $350000 | $17500 |
| $500000 | 50% | $250000 | $125000 |
| $400000 | 85% | $150000 | $120000 |
| $300000 | 95% | $100000 | $95000 |
*Really, this Contribution Margin, not Profit.
Note that the scenario where we only win the bid just half of the time has a greater payout than the one where we almost always win! This, at its core, is all you need to know to be a winner at poker. Ever hear someone say "it's not how many pots you win, it's how much money you win"? Ok, ok, there's a lot more, but once you really internalize this, you are well on your way. And, of course, the element of risk is captured here very eloquently. Notice that the element of risk is captured perfectly here, too. If you're a family-owned manufacturing company that's currently in the middle of a downswing then, hell, a sure-fire $95000 looks a lot better than flipping a coin to get $250000. But if you're a little software company owned by Paul Allen, then your mandate is probably to maximize EV and swing for the fences. This is all you really need to know to determine your poker bankroll requirements. To illustrate, your tolerance for risk in a $1/$2 no-limit hold-em game is a function of your bankroll. If you've got $35000 set aside in a bank account that's just for playing poker, well, your risk tolerance in this game is very high; you're not likely to take any actions that lower your expectations, such as buying insurance when you get all-in as a favorite.
Of course, there are dozens of ways that poker and business (finance, economics, etc) are similar, but these are my two for the day.
