Saturday, March 19, 2005

Signs of spring and market efficiency!

Sure signs of Spring: spring training, seeing robins, March Madness, now finance articles about baseball! (ok, so the last one is a stretch).

Hakes and Sauer (yes the same Skip Sauer who has the excellent Sports Economist Blog) have an interesting paper that looks at the premise of Michael Lewis' Moneyball book. WHat makes the paper interesting is what it says about markets in general.

For those of you who have not read Moneyball (I highly recommend it by the way), the basic story is about whether stats and computers can be used to effectively take advantage of inefficiencies in the baseball player market. It is centered around the Oakland A's GM Billy Beane who was an early adaptor of the technological/statistical approach) and very succesful at building the A's into a winning organization for millions less than other teams.

The paper's findings? "support Lewis's argument that the valuation of different skills was inefficient in the early part of this period, and that this was profitably exploited by managers with the ability to generate and interpret statistical knowledge. This knowledge became increasingly dispersed across baseball teams during this period. Consistent with Lewis's story and economic reasoning, the spread of this knowledge is associated with the market correcting the original mis-pricing. "

So how does this matter from an efficient markets perspective? It shows that markets do evolve and learn. This suggests that occasionally (with new technology--either electronic, mathmatical, operational, or financial) it may be possible to earn abnormal returns but that the success will quickly be copied and the abnormal returns will likely disappear. Given that financial markets have low barriers to entry and hence many participants, this can explain why financial markets are so difficult to beat.

Suggested Citation: Hakes, Jahn Karl and Sauer, Raymond D. "Skip", "An Economic Evaluation of the Moneyball Hypothesis" (November 3, 2004).

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