Jan

30

Basketball and Markets, from Victor Niederhoffer

January 30, 2008 |

12 Comments so far

1. Russell Sears on January 30, 2008 6:26 pm

   A line I am tired of hearing is “we never will know how many rogue traders made a killing in the market”.

   I would content its probably close to the Knicks record. If they have any “wins” they were probably much smaller than loses.

   Your discription of the rogue basketball players reminds me of the rogue traders.

   Anyone that has the ability to self delusion as a rogue can’t accept the harsh reality of a competitive market.
   And their basic strategy of pyramiding up and doubling down, can’t possibly be a winner long term.

2. Acetrader Fan on January 30, 2008 9:52 pm

   The dependence on throwing ever increasing sums of money at over the hill free agents against all common sense (and luxury tax penalties) rather than developing talent through the draft will hamstring the team for years to come.

3. Tom on January 30, 2008 10:35 pm

   Russel Sears writes “And their basic strategy of pyramiding up and doubling down, can’t possibly be a winner long term.”

   If moves are completely random it is a 0 expectation strategy so the total universe of rogues neither makes nor loses anything. Other than transaction costs the odds aren’t worse than 50/50 if your strategy is random.

4. George Parkanyi on January 30, 2008 11:49 pm

   I live in Ottawa Canada, and follow hockey, not basketball, and in particular the Ottawa Senators. I still remember vividly one play-off game against their arch-rival Toronto Maple Leafs. Ottawa led the series 3 games to 2. In this sixth game they had completely shut down the Leafs and were leading 1-0 in the middle of the third period. Even better (you would think), the Leafs got into penalty trouble, and were quickly two men down. Then disaster! Ottawa, instead of pressing their huge advantage, hung back and played defensively without trying to score. They were playing not to lose! The shift in psychology was seismic. I remember yelling at them “You idiots!”. Sure enough, Toronto immediately seized on the momentum change, began to press, and not only tied the game but won it in overtime, and then won the next game as well to take the series.

   Ottawa became too defensive and passed up a very high probability trade that they would have taken in a heart-beat any other time. By not following their plan, they missed their golden opportunity to win overall. How many times have traders done that? Second-guess their plan because of a sudden bout of loss-aversion? I know I have.

   And Ottawa had a good plan. It had got them into first place through the season, and had they stuck to it and played the percentages, had a high probably of continuing that success deep into the play-offs, maybe even the Stanley Cup. But they deviated from plan at the worst possible moment and snatched defeat from the jaws of victory.

   There’s such a thing as being too cautious in trading as well. If you don’t give yourself the opportunity to make big gains once in a while, or press advantages when you have them, you can lose confidence and start feeling ground down. (I wonder how the Civil War would have gone had the first real battle, Bull Run near Washington, played out differently. The Confederates routed the Union, had them on the run, and could have just walked into Washington, but decided to go home for dinner instead!)

   The inconsistency you describe in the Knicks suggests they don’t have a very good plan, either for the team overall, or the individual players (who should be positioned to contribute according to their ability and compatibility with the other players - defensive dividend stocks to provide anchoring and income, offensive tech and small caps go for bigger, faster gains; maybe you have options on the team to help with the transition game) - or if they do have a plan, they don’t apply it consistently. It speaks to a lack of confidence in something, maybe everything.

   If one stock or commodity market always gives you fits and continually disrupts your overall performance, perhaps you need to make a switch and bring in another player that better suits your plan and temperament - or at least doesn’t aggravate you and put you off. The Knicks may need to trade or cut the disruptive influences, and/or just go back to basics to develop some things that work within the game before going for the hot winning streak.

   The other oddity I find in sports, if we want to continue with that analogy, is the no-huddle offence in football. It seems that in the last minute of play, teams can virtually manufacture on demand a game-saving touch-down or field goal. I’m thinking, why bring out your best game only when you’re desperate? If you can score 14 points in the last two minutes, well why not just do the same thing the whole game and score 100? (But hey, I don’t get paid big bucks to coach football teams). The trading analogy would be only bringing out the best things that have worked for you in the past once you’ve lost half your capital. The rest of the time just you just keep getting stuffed on the same stupid plays through the middle and keep having to kick the ball away (eat stops).

   Cheers,
   George

5. Scott Stanley on January 31, 2008 12:52 am

   Basketball is like trading in many ways, concentrating on the fundamentals is what makes a winner. Whether it’s at the junior level or playing with the professionals, if you don’t look for high percentage shots, protect the ball, play strong defense, and rebound effectively the odds of winning decline dramatically.

   Also, you must scout your opponent to know which strategies will be most effective…man-to-man or zone defense…full court pressure or defend at half court…attempt long-range shots or work it into the paint. Environmental conditions also influence your decisions. Playing on the road in a hostile environment may require more/less aggressive play to withstand the volatility.

   When you find yourself looking at a deficit, don’t change strategies if you have a sound game plan to start with. Traders and ballpayers alike often feel the urge to switch strategies. Ballplayers often try to get “all ten points” back in a hurry like a trader will go for the “big kill” to make the monthly P&L more appealling. Any experienced coach will remind their team, “forget about being ten points behind, just get two points at a time.”

   The Knicks apparently are less focused on the fundamentals than most of their opponents. Most teams in the NBA look forward to playing the Knicks due to their lack of fundamentals and preparedness. They also know that they will deviate from core strategies when faced with adversity.

   Traders have the best of both worlds…after extensive scouting and preparing for the next opponent, they can choose NOT to play until finding an opponent they deem more desirable (and beatable).

6. Greg Rehmke on January 31, 2008 1:08 am

   Good basketball, like a strong economy, is a matter of coordination, not strength, raw power, or skill. The U.S has or had the world’s strongest housing sector, full of power players at building and financing homes. But even with the housing sector sinks shots from beyond the three-point line, without coordination with other players, the game is lost. Too many houses, even if efficiently built, is a misuse of talent. And goosing the money supply disrupts signals between savers and home builders and buyers.

   Booms are bad news for the economy, just as star 40-point-a-game players are usually bad news for a basketball team. A better team has a series of strong players that alternate strong, average and off games. And players involved in the offense usually play harder defense. So when the tech sector was booming, capable players in other sectors grew listless and paid less attention to their own game. Then housing was booming, now gold, oil and minerals are booming, each time a star player outshines the rest of the team or the economy, discipline, focus, and coordination tend to lapse.

   Economics, like basketball, revolves around teams of individuals solving coordination problems, and responding rapidly to competition with other teams. State regulations and interventions disrupt coordination, and monetary instability confuses the signal between players now and through time. The economy is more like a series of basketball games where today’s plays influence future outcomes.

7. steve on January 31, 2008 11:05 am

   Whether one speaks of basketball, football, baseball, cricket, the lessons one can learn are valuable and one finds are very similar.

   Basketball is most interesting because in team sports it requires the fewest players. There are but 5 players on the court at any time and there are but 12 persons on the roster. Thus those on the court are critical to the likelihood for success in the game. Lessons to be learned.

   Each player plays offense and defense, Although offense is always written about. The highest paid players are those who can put the ball in the hoop. Be it Kobe, Lebron, McGrady AI, they get the press.
   However the highest scoring team in history, the Denver Nuggets with Doug Moe scored more than anybody yet they did not win alot.

   You definitely need offense but defense wins championships. And defense requires chemistry. Five need to work together as one unit to achieve success. This requires great effort as playing defense is very hard to do. And it must be selfless.

   Successful teams train hard and practice hard.

   Successful teams focus on the task at hand. They have a single purpose and goal in mind and in front of them.

   Generally, to win championships you need two star players and the rest role players. The greatest team in history, the Chicago Bulls had Jordan, Pippin who essentially ran the team on the court and the rest were excellent complementary players. Paxon, Hodges, Rodman, Perdue, Kerr Grant. They each knew what they had to do to get to the top. In fact, it took over 7 years of Jordan being in the league until the team really took over as a dynasty.

   Basketball, is about matchups. This is the coaches job. To be able to put the pieces of the puzle together. There is a first team, and then there are substitute players. The substitutes although not noticed come in to give the first unit rest and recovery time.

   Basketball is about runs. A team may run off 10 straight points and stall out for a bit. And the other team goes on a run. The winner of the game usually has a great quarter and pulls away ultimately claiming victory.

   Successful teams play 48 minutes. They tend to win close games in the last few seconds. Look at the Bulls vs. the Cavaliers. How many last second shots did Jordan make to win the game.

   Some lessons:

   It takes time to put together portfolios. Instantaneous success is a canard.

   Star stocks carry you through. Yet they in an of them selves do not guarantee success. You need a group of different sectors.

   Play both sides. Offense and defense. Especially defense. Living to fight is always tantamount to success.

   Have leaders. Get the best stocks available. Just a few are necessary but pay for them.. Leaders more than laggards. EPS and sales growth, CANSLIM is to be remembered.

   matchups. Identify which stocks are moving and own them. great resource here is relative strength. IBD is helpful in this.

   Finally, show up for work every day. Focus while at work and work a full day.

   Sidebar: Rather than look at the Knicks at what not to do. Look at the Spurs. This is what one should do.

   I hope this is helpful.

   sl.

8. Russell Sears on January 31, 2008 11:52 am

   Tom,

   First, Pascal’s payoff (Expected payoff = 0 = payoff double for each correct guess of coin flip) for doubling … not tripling or 10 times the leverage. Also it assumes the both sides can take infinite loses…Yet what seems to trip the rogue is eventually he builds too big a position. The rogue is addicted to leverage.

   Second, reflexivity works if the markets are random or not.

   If the rogue is a small player, the self delusion, makes it hard to make it past those that prey on whatever is the drummed up bias of the markets of the moment. In other words if the markets trully are random, then someone must be betting against the herds bias to cancel it.

   But assuming there is no herd bias, the herds bias has control of the market or our rogue is smart enough not to fall for it and amasses a big position of gains. Eventually, the pyramiding makes him a significant player.

   Random markets assume that one player is not significant or if significant he makes many random bets.

   If a significant player is not making random bets, he is assuming the other players can’t figure out his next move.

   Pyramiding assumes there is always a bigger fool. Doubling down assumes you are not the chump at the table.

   Russ

9. Tom on January 31, 2008 1:42 pm

   Russ,

   Again, betting strategy cannot change a fair game into an unfair game. In other words, if you have a game of 50/50 coin flips then regardless of how leveraged you are or how you double up, your expectation will still be 0.

10. Pat Flanders on February 8, 2008 4:31 pm

    hi victor…i think that what the knicks suffer from, and this is the case with almost every bad team that has talent, is that they don't understand the importance of balance. the game is best taught by breaking it down - first with individual skills, then with two-on-two (you only have one person to pass to and you learn about lines - there are three lines with one other player on your team: 1) the line of the ball when you shoot it, 2) the line of movement when you put the ball on the floor and dribble it, and 3) the line of your pass). to be good at 2-2, you need to understand that it's not advantageous for one player to stand right next to another one because that will either impede his use of a line or kill the opportunity to capitalize on a line.

    next, you teach the players three-on-three, where you learn about triangles…this is where phil jackson earned a living. with a triangle you can really create mismatches through setting screens and moving the ball in such a way that you force the defense off-balance. the defense players have to commit at some point (this is why people like bob knight think that a zone is unmanly - you don't need to commit or risk anything. rather you react to what the offense is doing. but in a man-to-man, you rely on two things: committing and taking calculated risks. someone has to commit to the man with the ball - the other defensive players need to block off the passing lanes, which is risky because you potentially could get burned on a back-door). in a 3-3 situation, it's easier than in 5-5 to see where there are mismatches and where the defense is off-balance. you have the ball and your man commits to guarding you + another defensive player is over-playing his man, which means he runs the risk of losing him + the smart third offensive player in this situation recognizes this and can either create his own passing lane, or screen on the ball or off the ball. recognizing all of this with five players is really difficult, which is why breaking it down to 3-3 is helpful.

    then you move on to 4-4 and ultimately 5-5.

    but watching the knicks, you don't see players looking for an unbalanced defense that they can punish. they don't see triangles. with those big bodies, why aren't they setting effective screens? i think the problem is that most players haven't been taught to break down the game. they've been taught to either out-talent everyone else through effective 1-1 skills (which isn't necessarily a bad thing…if you're michael jordan, you simply can just crush a weak defender), or because they're only thinking of a pass as a pass, not as an opportunity to enhance the position of the ball on the court.

    i'm coaching first-graders right now, which is like herding cats. but every coach insists on playing 5-5 in our YMCA league…they have no concept how few players will actually touch the ball in that set-up, and how many more WILL touch the ball when playing 3-3 instead, AND how much more can be taught in that situation. unlike football or soccer, most american men think they "get" basketball and through watching the NBA, think they too can coach the game. but that attitude, along with a lack of educating coaches (seemingly gone are the days when college coaches would give free clinics to local high school and youth coaches) means that fewer players come through the ranks with solid fundamentals. if you watch a really great player, he understands balance, the importance of commitment, and how to recognize - before they actually happen - situations on which he can capitalize. i don't know if current NBA players can be taught that if they don't already know it.

    for fun, read art critic david hickey's piece, "the heresy of a zone defense" .

11. Russell Sears on February 8, 2008 6:06 pm

    Tom,
    I don't think I explained it well the first time so let me try again. The reason it is not a fair game, is that no party has unlimited credit, the rogue is addicted to pushing the limits and he doesn't find them until,

    1. Some third party ask for the cash on a loss. No 3rd party forces a rogue to cash in his chips while he is ahead

    2. The trade gets so large what he mistakes for a "win" is really manipulating the markets. Its not a coin toss, its buying or selling pressure, supply and demand. If you are the market, the market is not random. The house flippers are finding this out… If you are buying there is always liquidity but not if you are selling.
    If you were the bigger fool, the book profits are not realized, and the strategy "holding-till-you-are-whole-again" makes the time you are losing longer than time you are a winner. Thus the proportion of time you are losing makes detection while losing higher. To say nothing about the carrying cost. Leverage is borrowing money, you have to make up that spread somehow.

    3. If the size is always getting bigger, as in a St. Petersburg wager, the only way to recover is to go above any limits the rogue has to stay within either to avoid detection or because he doesn't have ready access to funds . When things are positive this pressure is not there. The wins can always be put in a separate undetected account, the losses have to draw from the internal public well.

12. vic on February 11, 2008 3:18 am

    I would like to thank all the commenters on the basketball post and my previous tennis posts who know so much more about these games than I do. I have much to learn these days, and have to go back to the drawing boards. Indeed, like Nock but without his elegance, I believe I have become … vic