Monday, 15 August 2011

What Baseball has to Teach Us About Business Success - a Review of Michael Lewis' Moneyball

I’ve just finished reading Moneyball by Michael Lewis, a writer made famous by his banking classic ‘Liar’s Poker.’ One of the modern classics of sports writing, Moneyball follows the story of a baseball team, the Oakland Athletics, which employed the unorthodox tool of statistics to pick players and win games.

The way Lewis describes it, the vast majority of the baseball industry relies on experience, intuition, and tradition to make these choices. In a sport that generates a vast trove of statistics on players’ and teams’ performances, only a small group of fans, known as ‘sabermetricians,’ used to bother subjecting the data to hard analysis. This changed in the late 1990s when Billy Beane, general manager of the Oakland A’s, realised that to stand a chance against wealthier teams he would have to organise his team differently. Together with Harvard graduate Paul de Podesta he set about analysing baseball to determine, amongst other things, how you can use historic performance statistics to value players (and work out which attributes are underpriced in the market), and which tactics help you win games. On both these questions the conventional wisdom was wrong, and using their analysis Beane and de Podesta put together a successful team on a low budget.

I myself am not a big baseball fan, but I was drawn to the book by references to it in a number of modern business books. The story Lewis tells has some wider messages that resonate far beyond the baseball diamond.

1. When used properly, statistics can be a goldmine

The rest of the industry were not ignoring statistics. They were simply focussing on the wrong ones. They had never subjected the raw data to a statistically valid analysis using the tools of probability, hypothesis testing and regression analysis. This attitude – taking basic statistics such as means, medians and ranges – leads to simplistic conclusions and overlooks the value of deeper analysis. Proper use of statistics can give a business an advantage over its competitors. It can also have great effect in non-competitive sectors such as public services or international development.

2. When a competitor is being unexpectedly successful, don’t dismiss this as an aberration

This is a mistake big businesses make all too often. They assume that a competitor’s success is down to luck, temporary trends, or the unique success of a single initiative or product. While this might be true, a competitor which consistently outperforms is probably doing something substantially better than you. There is no denying that baseball contains a strong element of luck. So when the Oakland A’s had a couple of good seasons, competitors were not too concerned. However even when the A’s continued to outperform year after year, with ‘winning streaks’ of historic length few competitors stopped and questioned how they did it. Even after Moneyball was published, much of the industry remained in denial about the power of statistics.

3. Don’t just accept the conventional wisdom – and don’t be afraid to look for a new way

The conventional wisdom in baseball was that you need to hire star players to make a team better. Billy Beane did not have the budget to hire stars – but he didn’t accept the conventional wisdom either. He looked for another route to success – one his competitors would have overlooked – and he found it. This is a step that many successful businesses, investors and entrepreneurs have taken, ranging from Toyota reinventing the way car production is organised to Apple’s launch of the iPad, a product in an entirely new category overlooked by every other electronics firm in the world.

As a book Moneyball has a great deal to offer sports fans in general and baseball fans in particular. But it also contains lessons that are useful to a wider audience, namely: look to the numbers, and if they conflict with the conventional wisdom, then the conventional wisdom is probably wrong.