What do the Red Sox, wine tasting, wars, and futures trading have to do with each other?

Ian Ayres of Yale University Law School in a lengthy podcast talks about the ideas in his new book, Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart. Ayres argues for the power of data and analysis over more traditional decision-making methods using judgment and intuition.

One example used by Ayres is that statistical analysis of rainfall data always predicts the quality of a particular Bordeaux vintage (and its future market price) better than the most experienced human wine tasters. The image of some Budweiser-drinking good-ol-boy with a laptop outdoing the supposedly erudite blue blood glass sniffer has some appeal to me. The major point of Ayres’ thesis as I take from it is that we can all compete with the “experts” on almost anything if we do the right preparation.

A Good Magazine (online) article titled The New Nostradamus is one more twist on the data/analysis vs. judgment/intuition approach to understanding and predicting complex human group behavior. In that article, Bruce Bueno de Mesquita, a well-credentialed professor of political science, talks about his analytical approach to predicting the outcome of complex litigation and even the likelihood of wars between nations.

I recently participated in a discussion about Bruce Buneo de Mesquita with people whose opinions I generally respect and was taken aback by the general hostility to the validity of de Mesquita’s methods and by extension to him personally, although nobody in the group had ever met him. de Mesquita’s batting average on predicting the outcome of big issues is better than 90% BTW. He also has a consulting business that you can hire to answer a question for a minimum of $50,000. Actually 50K buys you exactly two answers, but you get the idea.

What do the Red Sox have to do with all this? Two things. One is that John Henry, a billionaire futures trader, bought the Red Sox before the 2003 season. It was right around the time that Moneyball was published. Moneyball is a book about how number crunching geeks who never played baseball could put together a better baseball team than baseball people who had been around the game their whole lives but who relied exclusively on their judgment and intuition. I cannot say to a certainty that anybody in the Red Sox organization even read Moneyball, but I knew who John Henry was and that he was a quant.

With baseball analytics in the air I understood immediately that the future Red Sox would not be business as usual. Interestingly, I saw exactly the same response as I observed in the de Mesquita discussion when the concept was floated in an elite Red Sox forum. That tells me that there are still huge opportunities available in any field where the “smart” individual can position against the crowd.

In late 2002 the Red Sox hired a rookie 29 year old general manager who immediately hired Bill James, the Bruce Bueno de Mesquita of baseball, and about a dozen number crunching geeks. To the Red Sox management’s credit they used their considerable analytical skills (and cash) to assemble a baseball team and then left it completely to real baseball people to run it and play the game. The rest, they say, is history.

Since I was following every move of the Red Sox in minute detail at the time I reasoned that if analytical skills could trump intuition in picking productive baseball players, then could not analytical skills also trump intuition in betting on baseball? I was also doing market research at the time, and once you realize that the “books” function is to change prices to facilitate trade in his product (the wager) and not to predict the future, betting on baseball and futures trading looked very similar. One thing that seems easier to internalize with baseball than with futures trading is that analysis is really only about 10% of the process, and that diversification and money management are everything else. Losing 4 or 5 baseball wagers out of 10 on any given day is no big deal when the pot grows. There is never an expectation of winning every wager. It seems much more difficult to accept that kind of healthy thinking while trading.

When I finished my baseball research I organized my notes into a little book. It seems that book writing is the only way I can keep my ideas from disappearing into some memory black hole. I put Betting on Baseball online so you can read it and see if you get anything out of it, about rethinking your approach to trading or even betting on baseball come Spring time. You can get even better results if you use analytical techniques (Runs Created formulae) to construct every team every day from the recent actual performance of its individual players but that is another story.