|
Billy Beane, General Manager, Oakland A's
Michael Lewis Author, Moneyball: The Art of Winning an Unfair Game
In conversation with Roy Eisenhardt, former President, Oakland A's
Roy Eisenhardt: Michael, since you are a financial writer by basic training and discipline, what interested you in this general topic?
Michael Lewis: It started as a magazine piece. The commissioner of baseball had been saying for years that there was this financial crisis in baseball. You had pretty radical differences between the haves and have-nots, and they were becoming more radical - the rich were getting richer and the poor getting poorer. He was saying, in this environment the problem is that money buys success and poor teams can't win. There was this great exception in Oakland - a poor team that not only was winning, but winning more games every year in the face of larger and larger piles of cash. Writers are always looking for little vacations from their lives, and I thought, I'll go to spring training and write a fun piece for The New York Times explaining this. I saw Billy and talked to him and to Paul DePodesta, his assistant. Almost immediately it was clear that it was a big story. I didn't quite know what I was going to do with it. But the reason for their success was the market for baseball players and baseball strategies was inefficient and irrational -
Eisenhardt: - in an economic sense.
Lewis: They were living with this dramatically smaller pile of cash and succeeding because they were identifying inefficiencies in the market and trying to exploit them. Whether they were right or not in the details of what they were doing, the very idea that the market for baseball players is inefficient was fascinating to me. Here you have people who do what they do in front of millions of people every day whose every move is measured and evaluated and discussed, who have statistics attached to their performances. If these people are misvalued, who isn't? Isn't that an amazing thing?
When I do pieces longer than a column it means immersing myself. They let me hang around - and let me bang down their doors when they didn't want me around. The more I was in the story, the more it became clear it was a big narrative. Two of the more important Eureka! moments were the realization one that Billy was a great character. I don't run across a lot of people in interesting situations who have the complexity of a novelistic character, and he did. The second thing was something Paul DePodesta said: For a player to become a member of the Oakland A's he has to have something wrong with him. We can only afford the guys that the market values improperly. That locker room was filled largely (not exclusively) with players who had been underestimated. One day Jim Mecir wandered out of the bullpen, and I said to Paul, "So what's wrong with him?" And he said, "Oh, he has two club feet." If you have two club feet, where do you play? Oakland.
Eisenhardt: Some theses that got developed in this book go beyond the insider's look at scouting or clubhouse behavior.
Billy Beane: We were, in a sense, mathematically creating a baseball team. Baseball's always been a very subjectively evaluated sport; people will listen to what somebody says, take it for fact and never investigate those facts. When [former A's General Manager] Sandy [Alderson] was here, he started taking an academic approach and looking at numbers. Guys like Bill James, who didn't have any subjective analysis to them - it was all objective; it was not looking at players, it was looking at what players did. Being a former player, I was a person who was judged on the way I looked in a uniform; the things that didn't translate to winning baseball - running speed, throwing arm, which are a part of being a good baseball player but aren't really that directly relevant to winning. It's what you do with those things and the measurements that you use for those things. We found the two most linear statistics, as it applies to winning baseball games, are on-base percentage and team ERA. Those two statistics have the greatest determination on where a team's going to go. Everybody knows pitching; we can't afford pitching. To acquire pitching we had to develop it and do it through the draft, which didn't cost us money; it wasn't a bidding war. The one statistic undervalued was on-base percentage.
There were players that maybe did one thing and one thing only - that being on-base percentage - and were available to clubs like ours. A guy like a Matt Stairs who was 5'7" tall, weighed about 210 pounds, couldn't run, didn't look good in a uniform - but if you eliminated the picture of Matt and you looked at what he did, he was a guy that baseball completely overlooked. It cost us ten cents on the dollar to acquire this player. We started vacuuming up these guys who baseball people had subjectively determined weren't good enough to play in the major leagues and we could get at a cost that we could afford.
Lewis: It was a moral crusade; he's liberating fat guys who could hit.
Beane: Or short guys who could hit.
Lewis: And it's a noble, moral crusade. I had seen something like this before - on Wall Street. Financial markets are much more efficient than the market for baseball players. They're inefficient in some ways but not as grotesque, the inefficiency - except when new classes of financial assets get drained up. On Wall Street in the mid '80s, there were these things called options and futures that no one had ever heard of, and interest rate swaps and all of these complicated things. A lot of macho men traded by the seat of their pants, were eyeballing these things and saying, "It's worth X" - and they were wrong. You could put precise numbers on what these things were worth, you just had to be a little more clever. All of a sudden this new creature appears on the Wall Street trading floor and has the Ph.D. in physics from MIT who is valuing options and futures precisely. They make a killing. They make the markets efficient. This is exactly what's happening with the Oakland A's. The Ph.D. in physics instead is a guy with a Harvard undergraduate degree who's clever with numbers. It's bringing in a new kind of thinker into baseball.
The premise is sort of radical: We can assign precise evaluations to what baseball players do. We know exactly what on-base percentage is worth, what ERA is worth, what a walk is worth, what every event that happens on a baseball field is worth; therefore we can take all the events a baseball player has done over the past ten years and say what this guy was worth.
There are two parts to the problem from that point of view: the radical new thing of assigning precise numbers to what this player has done - dollar numbers; the second is developing tools for predicting what he will do based on what he has done. The first is almost an exact science; the second is never going to be an exact science. But you can do better than just guess. That baseball had never done this was really interesting, because there's so much money at stake - and glory.
Eisenhardt: Billy, translate that to a specific application - the value of a sacrifice bunt; if a walk is worth x in terms of run production - what you do after that.
Beane: Every situation in baseball has a value. You can measure it; people just don't do it. You can take the aggregate of each of those events and have some predictability as to what's going to happen. That said, every situation the A's have over the course of the season, we keep track of: how many times is a runner on first with nobody out; how many times runners on first and second with one out. We know what's going to happen, because it's been measured for a hundred years in baseball. We know the percentages a guy has of scoring with a runner on first, nobody out.
Eisenhardt: And that is?
Beane: There's, let's say a .45, .48 for a runner on first, nobody out; it actually decreases -
Eisenhardt: - on a run?
Beane: Per run. We measure everything in runs. That's our -
Eisenhardt: - money?
Beane: Our tender, yes. We measure it so when you ask me and we have to give an answer and explain to the sportswriters or even our own players as to why we do and don't do things, we tell them.
A runner on first with nobody out versus a runner on second with one out. Who has the greater chance of scoring? Most people - baseball fans - will say a runner on second with one out has a greater chance of scoring. That's not true, because we've measured. I asked Michael, "What does that tell you?" He right away goes, "The sacrifice bunt's a waste of time." I said, "Klondike, you're way ahead of the rest of baseball." People assume that that's our opinion. It's not our opinion; it's a fact.
What we try and do when we run our club, choose players, to some extent when we talk to our manager about running a game, is run it based on fact. When someone turns on "Sports Center" and they see [former San Francisco Giants manager] Dusty [Baker] bunt over Kenny Loften to second last year, and the guy gets a base hit and he scores, and everyone says, "Now that's small ball - that's baseball." That's a soundbite. If they did that over the course of the year they would be costing themselves runs. We deal in facts, and over the course of the season if we do not bunt in these situations we will score more runs; therefore, we will win more games; therefore, we will go to the playoffs.
Lewis: I wondered sometimes if this ever would have happened if all the teams had the same amount of money. There never would have been this intense pressure to make the most of your money. Fascinating to me is to watch an attempt at perfect efficiency inside of a baseball organization.
Eisenhardt: It's not as though you're using this to run the team with the highest win-to-payroll ratio. You are running the team this way to not lose money and win the division and, hopefully, the World Series.
Lewis: And win a World Series, which is why we know he's not that smart.
Beane: There's always room for improvement.
Eisenhardt: Do you feel your approach has been validated by the outcomes?
Beane: Certainly in the results that we have with the Oakland A's. Now is there's a ripple effect - the best example is J.P. Ricciardi in Toronto doing exactly what we're doing starting anew with the Blue Jays and having a lot of success relative to their recent years with the other guys running that club. Another example is Theo Epstein in Boston. So we know it works.
Eisenhardt: The new wisdom that you've created is that this works for the season - but you can't win in the playoffs.
Beane: No, not can't win. To quote the book, I said, "My stuff doesn't work in the playoffs." The great thing about baseball is that 99 percent of the time the best teams will be playing. That's not necessarily true in football, because it's 16 games. There's not enough predictability in 16 games, and schedules will be a determining factor. Baseball - the math works. It's like a blackjack table - if you stay long enough, you're gonna lose; in baseball it's the same thing. Everything will, because of the length of the season, work out. Cinderella stories exist in May and in June; they don't exist in September in baseball.
When you get into the playoffs, you have random events: five games to determine a first-round winner after 162 games has pared everybody out. The playoffs aren't even seeded. We won 102 games a couple years ago and were the wild card, had no home-field advantage throughout the playoffs. There's teams winning eighty-something games who had home field advantage. When you have five games, a single event can determine half of the outcome of a playoff series. There's more luck involved, and what we try and do during the season is eliminate luck and deal with predictability.
It's mentioned in the book - our criticism that that style doesn't work in the playoffs. You got to play small ball, which is hogwash - last year that was apparently the reason we didn't win. Ironically we scored more runs - averaged over five runs a game during the playoffs. The problem is we gave up more runs. We didn't lose because we didn't bunt; we didn't take the extra base. We lost because our pitching wasn't good. The Angels won because they beat the tar out of the ball and out-slugged every opponent they had during the course of the playoffs. They were a hot team at the right time. But the fact of the matter is we, over a 162 games, beat the Angels. We won 103 games; I believe they won 99. We were the division winner.
Eisenhardt: Michael, you saw it from the outside a little better; how did you see baseball responding to your book?
Lewis: It was the great moronic inferno. Dallas radio, I'm on with guys who actually like the book - sports guys - and they said, "We're going to play you a tape of what Buck Showalter, the Texas manager, said about the book yesterday." They played the tape: "This book is such nonsense. Every line of it is wrong. The guy doesn't understand the game." Then they say, "Buck, did you read the book?" "No." This was typical. More of the people who were upset about the book hadn't read the book.
A lot of people were panicked and didn't realize they were panicked. It was, in the first place, several GMs saying how bad it was for Billy that I had written this book. One was Steve Phillips, New York Mets GM. I keep worrying each one of these guys is going to be fired - they were all GMs of teams that were spending huge sums of money and losing ballgames.
The next wave of criticism - and it was loud - was lots of things written and said to the effect that it's a shame that Billy Beane wrote this book. Beane was the person who wrote this book; I wasn't even a ghost-writer. Even for the people who acknowledged that I existed, I was Billy's pawn. (It was such the reverse of the truth. I had to use all of my guile to fool Billy into letting me get this story, and it was always a question in my mind of when the door would close.) The motive - they needed a motive - was that Billy's ego was out of control. He wanted nothing to do with the press; he was hiding from them all the time, so the idea that what he wanted was attention struck me as nuts. My general view of the response is exactly the response of a culture that does not want to grapple the actual content of the book. What they want to do is see if they can dismiss it. One of the tactics in the late stages was to try to get Billy to say that it was all BS, to divide us. Generally the book has done the job of creating some discomfort out there in the minds of people who are running their businesses badly.
At one point I did say, "My job is to find out every last secret you have. Doesn't it disturb you that I'm going to try out a blueprint for everybody else?" It was Paul who said, "What we do - most of the intellectual property is out there on the web, and nobody's using it now. There are a couple of teams that have conceded the wisdom of the model and they are imitating us, so that's already started. We reckon that we're not going to have this kind of advantage forever anyway, but the business is so hard-headed, it's so resistant to new ideas that no little book you're going to write is going to change that."
Beane: Some of the things really we weren't that worried about; it was common knowledge. It continues to stimulate us, and it forces us to continue to be creative, and we do. We don't want to be in a position of creating our own box for ourselves and constantly evaluating what we're doing. As soon as we think we have the answer, we end up becoming like everybody else.
There's so many different angles you can go when your creating a baseball team. We've gotten a lot of publicity for creating it one way, but we're looking at every way we can and taking advantage of the inefficiencies of the market happening now. The highest paid players in the game as of this date are on-base guys, starting with the Bondses. That means somewhere - because it's an finite market - are people who are undervalued.
Eisenhardt: Something I came across - a Morgan Stanley market outlook paper on asset allocation recommendations - says that some portfolio managers pay attention to quantitative analysis and some firms run money using that approach, but most money is still managed the old-fashioned way. It says, it was perhaps because of my thinking about an alternative approach to investment management that I responded to enthusiastically to Michael Lewis' new book, Moneyball.
Lewis: I'm amazed how this book hit Wall Street. I don't think the financial markets are inefficient in quite the same way that the market for baseball players is. If you'd asked me before the book came out, Who's going to grab this and say this as a metaphor for what we do, I thought Wall Street - but I thought also anybody who worked in an industry where the employees were talent. The real lesson is: It's nuts the way people are valued, especially the way celebrity employees are valued. The Oakland A's model implies that stars are a lot more replaceable than commonly presumed.
Business is often dull, and there's a reason why business people are always grumpy - they're looking for sports metaphors to describe what they do. They have this story about a bunch of guys running a baseball team who are groping for business metaphors to describe what they do. That's flattering and interesting, and that they're reading a book about a market that everybody thinks they know; everybody thinks their opinion is right about baseball. People on Wall Street who thought they knew this market are seeing someone operating this market in a way that just shifts your brain to the left about how you think about it altogether. It's a fantasy for them. It's how they wish the financial markets were, that you could approach them in such a different way and make so much money doing it. There is opportunity for people in the financial markets who do things more rationally than other people, but it's not quite as dramatic an opportunity.
Eisenhardt: Billy, have you been asked to go on financial news network broadcasts?
Beane: In a pretty large publication, I was named a finalist as one of the top investors in the country. I found that a little humorous. I told them they needed to look at my portfolio. A lot of mutual fund managers were using this as a model for their own investors. He then asked me, Can you give any investing advice? I said I'd be a fool to comment on something I don't know a lot about and you'd be a bigger fool to listen to me, so I would say refer to Warren Buffet at that point.
Lewis: My goal was to start a conversation between baseball and the larger culture; to create so much noise that baseball couldn't ignore the book. The book says you can measure the efficiency of the ways these other organizations are run. It is not just impressive what the Oakland A's have done - it's bizarre. It's bizarre how different it looks, how much more efficient it looks. In any other industry, the Oakland A's would've acquired all the other teams and run them, too. Nobody reads a book and goes, "This guy's right, I am so dumb." The GM says, "I'm not reading that book." The owner says, "I'm tired of losing money." The owner's friend who runs Goldman Sachs says, "You fool, read this book." And the owner says, "All right." Then he yells at his GM. That's how change happens.
