Moneyball

I just finished reading "Moneyball" by Michael Lewis, which tracks the rise of the Oakland A's under Bill Beane who applies statistics and science to baseball. It is a great book, and I recommend it to all.

My old Chicago professor Dick Thaler (along with Cass Sunstein--who lived on the South Side of the Midway) have a nice article talking about Moneyball. Their main question is: how come it took people so long before they figured out what Bill James, the fellow who figured all this out and now works for my new local team, the Red Sox, has been writing about for years? The basic explanation for efficient markets is the same as the explanation for why you don't find dollar bills lying around -- someone will have picked them up already. But baseball has been leaving literally millions of dollars on the sidewalk for decades.

If the baseball labor market, with so much available, recorded data, remained horribly inefficient for so long, how much trust can we have in the regular labor market? This is an appropriate question given the recent hubbub around executive pay and wages in general. Thaler makes the case that interviews, for example, are a terrible way of predicting performance and some sort of regression (equation) looking at things like test scores etc. do much better. This means that taking time to interview candidates--unless you are going to be working with them personally--is a waste of time and you're better of relying on an equation to judge the value of someone as a potential employer. When people hear this they tend to be revolted, and I sympathize with that, but I also think there is a lot to it. Regressions are better at picking winners in state fair animal contests, and job candidates.

I had lunch recently with a mathematician who ran statistics for the Air Force, and his job was coming up with the equations they use to select which applicant gets to be a pilot. I've also met a clinical psychologist who studied atheletes and criminals, but now worked on designing tests to pick future traders. It's nice to see that rationality in hiring is not restricted to baseball.