My simple query about what baseball can teach us about markets has tapped into a beautiful reservoir of insights and consiliences. In that spirit, and I honor Larry Ritter, who challenged Collab and me to come up with 100 relations before he told us the truth about the "doctoral degree" he awarded to the former Chair, as his thesis adviser. I am going to sponsor a contest similar to the one we sponsored about whether prices tend to Lobagola. For the best little paragraphs, hopefully with some numbers that show what we can learn from baseball about markets, I will award a $500 prize. All entries will be published. The deadline will be June 15. The judges will be me, Doc, and the east coast surfer.

Nick White clarifies:

Two quick things:

1) Must we limit the baseball contest to baseball, or might we generalise to the wider lessons that elite sport in general might teach?

2) A repeat of the best, most fundamental lesson: while waiting for our GDP number to come out, I cut my position till the print. I loaded my order into the screen and hovered my mouse over the trigger for when the number hit the wires. However, I hadn't noticed that I'd accidentally right clicked while staring at the screen until 2 seconds too late…after 22 lost points an d much cursing I recalled that one is always handsomely rewarde d for checking their equipment prior to taking the field….No more trading for me today as I'll be far too tempted to chase.

Steve Ellison adds:

Rule changes, environmental changes, and new techniques can greatly affect the game, in baseball and in markets. Jeff Pearlman wrote an article for The Sporting News in April entitled "The Death of the Stolen Base". Mr. Pearlman presented some statistics about the decline in stolen bases in major league baseball over the past two decades and then looked for reasons for this decline. He singled out two major factors.

There are increasing numbers of baseball parks with retro designs, such as Camden Yards. These parks typically have smaller dimensions than the generic stadiums of the 1960s and 1970s, increasing the value of power and decreasing the value of speed both on offense and defense.

Pitchers responded to the baserunning havoc wrought by Rickey Henderson and Vince Coleman in the 1980s by developing the slide step, a technique that shortened the pitching motion and hence the jump a would-be base stealer could get.

Alston Mabry adds:

Regarding the article "the death of stolen base", does it mention that the Bill James and the sabermetrics folks have been arguing against stealing for years because of success rate doesn't justify the cost of an out. They may be having an effect on manager thinking.

Stefan Jovanovich interjects:

Saber metrics can be a bit like the joke about the 3 actuaries at the carnival shooting gallery (the 1st misses 1" to the left, the 2nd 1" to the right, the 3rd says "we won the prize"). What James' statistics don't adjust for is that the "success rate" for steals includes the runners thrown out on missed swings on hit and runs. A good base stealer (one who is safe 80% or more) is worth the risk because, with his speed at 2nd base, a run can be manufactured with one hit instead of two. Since competent pitchers average 1 hit per inning, stealing from first to second is worth the risk. So, for that matter, is stealing from second to third with less than two out. The decline in stealing is a function of the fact that base stealing takes practice, and few managers even at the high school level are willing for accept the error part of the "trial and error" process - even though it is the one skill that gives the ordinary hitting team a chance to defeat a superior pitcher. Also, at least here in the U.S., the kids with the smaller frames and quickness that you need to be a good base stealer are playing soccer and basketball. There is hope, however; Ichiro is now the model for the Japanese leagues. Somewhere in Osaka Prefecture a kid is probably studying Maury Wills video right now.





Speak your mind

14 Comments so far

  1. Jim Simon on June 3, 2009 11:23 am

    Among the many lessons Baseball can teach us is don’t try to hit a home run all the time. “Small ball” or chip chip chip and beat your opponent can win more games. Stick to the fundamentals. This obviously applies to the market in not trying to score big all the time but stick to the fundamentals. Play for the long run but take advantage of the game or market conditions.

  2. Jim Simon on June 3, 2009 11:25 am

    Stick to the fundamentals. Play good basic baseball. Do Due Diligence, Know your opponent and the market. Don’t try to kill the ball. Get on base and keep moving them around.

  3. diego joachin on June 3, 2009 1:54 pm

    Baseball is all Pitching. Markets is all Trading. If you have never completed a strikeout [profit] or have never commit a mistake in an important game [loss] then try not to speak about either.

  4. Hans Heytens on June 3, 2009 5:16 pm

    - Keep a low profile when the public/press goes wild on you hitting a home run. Stay humble all the time.
    - Don’t brag about how good you are. Prove it. If you can’t prove it yet: study hard, trial and error is the best way to achieve fast results
    - Find a good down to earth coach who has seen it all and lived it all. Let him improve your mental state when you already know you have an edge in your batting average.
    - Know when to run but don’t push your luck if your team is already well ahead.
    - Never argue with the umpire, in the long run his rulings will average out so there is no reason to get upset.
    - There is much to be learned by studying the history of the game.
    - Defense is as important as hitting
    - When you feel you have the hot hands, enjoy it while it lasts but be well prepared for a setback.
    - When scouting for talent, mainly search for strong potential and ambition. Training talent instead of hiring the best can lead to great surpises.
    - Never give up.

  5. Robert Mahan on June 3, 2009 7:53 pm

    -The order in which the hits fall matters. A 9 hit game, a single each inning, doesn’t score. But a nine hit game with nine hits in one inning! Market: Where are you in the lineup/order-flow? Is there a cleanup hitter batting behind you?In front of you?

    -The intentional walk: they let you on base, to your detriment. Did you get in the market or did the market put you there? Get ready for a double-play, boys!

    -The sacrifice bunt: usually a bad bet. Larry Dierker told me once: The bunt made sense in the days before Ruth, when baseball scores resembled soccer scores and squeezing one run in might be a game winner. But getting out on purpose is usually a bad idea now. Market: being too clever by half and thinking YOU can set up the mistress. How many decades did managers continue to over-utilize the sacrifice bunt long after it made sense? And the cycles had changed so early in the century! Are you reading almanacs and trying what would have worked well a century ago?

    -Pitching is mainly trickery, except sometimes the fastball. If you can throw the ball 100 mph, like Nolan Ryan, it’s going to be hard to hit whether you expect it or not. When the market moves very quickly in the same direction, one senses they can predict it continuing to move. But even if you are right–and swing–can you hit it? Or will the ball be in the catcher’s mitt by the time you start? You can’t hit what you can’t see.

    -Little known fact is that the drag coefficient on a baseball (which is a rough surface) is variable with velocity and if you push through a threshold velocity the drag coefficient drops non-linearly. So the harder you hit the harder you hit.
    Reminds one: Mantle, asked if he ever TRIED to hit a homerun, replied “Everytime.” Market lesson: don’t fool around. But also: you’re no Mantle.

    -Baseball is a game of statistics. I loved baseball statistics as a kid. Now I hate the trivial situational stats you hear all the time by announcers, but I love Sabermetrics. Market: I started out learning tech analysis. Now tech analysts sound to me like managers who still think bunting is a good idea. Search for meaningful market statistics.

    -In the school yard, sometimes you could quick-pitch a kid. He’s standing in the box not paying attention. You throw a strike before he looks up. A fight ensues, but hey, Kid: you were standing in the box! Market: are you in the market but not paying attention? Kid, you’re standing in the box! Are you playing like a kid in a schoolyard?

    -If you are a real baseball fan, you have probably witnessed games whose likelihood seemed infinitely improbably. But of course you’re going to see such games! After all, you’re a real baseball fan and you’ve seen many games! But you’ve never seen it all. Statistics don’t lie, but there is a huge disconnect between statistical expectation and human psychology. Market: don’t lose your sense of possibility. But don’t lose your head, either.

  6. Chris Monoki on June 3, 2009 10:02 pm

    The batting line up and bench have two apsects akin to the marketplace: diversity and the Power Law. One can compare the line up, the placement of hitters in that line up, and the bench for either pinch hitters or runners, to a stock portfolio. You have your up-and-comers; fast runners and base steelers; single hitters and homerun kings. They are allacated, in terms of their skill, especially in the line up, much like stocks in a portfolio — consistency, production, results. If a ballers keeps these aspects, he remains in the line up (portfolio); if he doesn’t he’s replaced (sell the losers).

    Pareto is also in the line up: 20% of the line-up, staticically speaking, produces about 80% of the results. The 1st batter (fast), 2nd (consistent), 3rd (mix) and clean up (homerun king) produce results far greater than the latter line-up.

    I might add that contracts can place a player overvalued, adversely affecting the club (portfolio) and allocation of talent. If too pricey (overvalued), sell and open room for more fair value, even diamond-in-the-rough player.

    Portfolio management is essentially no different.

    Keep pressing,
    Chris Monoki

  7. Rocky Humbert on June 4, 2009 7:58 am

    To Robert Mahan:
    You wrote: “-Little known fact is that the drag coefficient on a baseball (which is a rough surface) is variable with velocity and if you push through a threshold velocity the drag coefficient drops non-linearly. So the harder you hit the harder you hit.”

    You make an intiguing observation (and market analogy), but I fear it’s a bit misleading. See this NASA website for the physics equations/graphs comparing a smooth ball with a baseball.

    NASA agrees with you that the threshold velocity for reduced drag is less for a baseball than for a smooth ball. But, once the “threshold velocity” is exceeded, I intrepret NASA’s charts and equations to mean that drag increases by velocity-squared…and at high velocities, a baseball’s drag increases faster than a smooth ball’s drag. (Are there any physicists out there that can clear this up, please?)

    This no way diminishes my interest in your observation — but it challenges the platitude “the harder you hit, the harder you hit.”

  8. Rocky Humbert on June 4, 2009 11:20 am

    In my haste to "hit" the enter key, I neglected to proffer my favorite trading/baseball analogy:

    As every Cubbies Fan knows: "There's always next season."

  9. Tuzo Wilson on June 4, 2009 4:03 pm

    The biggest lesson that baseball can teach you is how to deal with failure. A great hitter will fail to get a hit 70% of the time. Actually, not just how to deal with failure — but how failure is a basic part of the game. It is expected. You can do everything right and still make an out. Since failure is a big part of the game, keeping your confidence when things aren't going your way is of utmost importance. The application to markets is straightforward: expect and prepare for some trades to go against you. And, when they do, try to realize that it is part of the game.

  10. steve on June 4, 2009 11:38 pm

    To a trader, every trade means something, every position is important, slippage, mistakes, errors, ommisions, “picking up loose change”, getting good fills all factor into money at the end of the day, week and year.

    to complement the discussion posited here by my colleagues, look at the best hitter in the game today. Ichiro Suzuki. There are some extremely interesting things that one learns here.

    First is his batting style. He is very unique as he bats left handed and looks as though he is running toward first base as he swings the bat. He is an amazing contact hitter and extremely fast. As a result of these factors, he puts great pressure on the infielders to throw him out at first base once he puts the ball into play. I really cannot think of anyone to compare his batting style to in the current era. Perhaps one who you could compare him to would be Pete Rose. Pete would “cheat” by making contact with the ball and similarly already be running toward first base. For those who forget, Pete was a switch hitter, and also played many positions during his long and productive career. He also holds many records that unfortunately do not show up in record books due to his banishment from the game.

    Second, compare Ichiro’s 2008 stats to his 2007 stats. In 2007, he played in 161 games had 678 at bats 238 hits and had a .351 average he led the majors in infield hits with 44. In 2008, he played in 162 games, had 686 at bats, 213 hits and a .311 average. Thus, he had nearly the exact same number of at bats with the difference being he had 25 more hits. This would be equilavent to one more hit every 27 at bats. or one extra hit every 7 games. This changes his season from a productive season to a great season. His one extra hit every 7 games puts him on the front page of the Sports page rather than just in the box score.

    There is a great dialogue in Bull Durham between Crash Davis played by Kevin Costner and Ebbie Lalouche played by Tim Robbins. They are in a pool hall, Crash is drunk and he is explaining the difference between a good year and a great year. How a batter who picks up one extra “flair” one “Texas Leaguer” one “dying quail” and gets a great season and a great contract.http://www.imdb.com/title/tt0094812/

    Interesting fact. Prior to Ichiro coming onto the scene from Japan, Nomar Garciparra held the batting title in 1999 and 2000. Nomar is not heard from so much any more filling out his career with the Oakland Athletics. He and Ichiro are the same age. Yes it is the very small things that make the great differences.



  11. Mark Candon on June 10, 2009 10:56 am

    Victor, here’s my entry to your contest. Thanks, Mark Candon

    Never cross the bats. Always check the wind. Early on, play for the big inning. If you’re the batter and the count’s 2-0 or 3-1, swing for the fences. If it’s 3-0, make yourself small and crowd the plate. If it’s 0-2, choke up and just make contact. Spit into the mitt. Always advise the umps on the best restaurants. If the shortstop’s been stepping on your teammates, slide into second spikes up. The best defense should be up the middle, and the best arm in right. Infielders must move in for any play at home. Use two hands while catching the ball. Never step on the foul line if you can help it. Nice guys finish last. If the bats go quiet, bunt, but never bunt if the opposing pitcher has a no-hitter going in the late innings. If the cleanup batter struts too much, knock him on his seat. A good catcher’s target can expand the strike zone. With a lead late in the game, good defenses guard the lines. Go for the win on the road, the tie at home. Never shave before a big series. Momentum is tomorrow’s starting pitcher. Go down swinging. And if you’re hopelessly lost at bat, take two and hit to right.

  12. Steve Leslie on June 11, 2009 9:58 am

    There is a tried and true maxim that has endured over the years and decades that baseball has been contested and that is "Respect the Streak". A streak is a remarkable event that really is so beautiful to behold that it must be revered because nobody knows where they come from and when they will appear. Conversely nobody knows when the streak will end. Therefore one must take advantage of it when it appears.

    Case in point. The 2008 Cy Young winner in the American League was Cliff Lee for the Cleveland Indians. In 31 games he compiled a record of 22-3 and a .254 ERA. He also struck out 170 batters walked but 34 and gave up 12 home runs. Cleveland finished the season at an even 81-81. Cliff Lee followed C.C. Sabathia who was the Cy Young award winner the previous year at 19-7.

    In 2007 Cliff Lee started 16 games with a 5-8 record and an ERA of 6.29. He also yielded 17 home runs 26 walks and 66 strikeouts. In 2009 his stats are as follows 13 starts 3-6 5 home runs 18 walks 63 k's and 3.17 ERA. Thus sandwiched between two very average seasons pitching for the same team he had one very magical season that will forever associate his name with the greatest pitcher baseball has ever seen. Yes streaks do occur and they can define a players career.

    The same happens in markets. Hersch Shefrin mentioned in his book, Beyond Greed and Fear, Understanding Behavioral Finance and the Psychology of Investing that streaks occur in stocks. His study concurred that a stock that has reported a better than expected rise in earnings with do so for a period of time. It will take some time for the analysts to catch up to the stock as for their earnings projections. As a result, the stock will go through a period of outperformance, his suggestion is that 9 months is a good time frame, coincidentally roughly the same time period as a baseball season. Therefore the moment for the trader to make money in the stock is when everyone is seemingly trying to catch up to the stock. It can make all the difference in the world to ones portfolio. Further discussions on how to identify the potential for streaks is offered by William O'Neil in his book How to Make Money in Stocks. His methodology for selecting stocks is discussed in his book and his Investors Business Daily on a regular basis.

  13. Ken Drees on June 11, 2009 12:35 pm

    Contest Entry:

    An ocean of statistics rolls forward every moment in the markets and every moment in the game of baseball. Waves of individual data crash and feed into team data, league data and ballpark history is made, one pitch at a time. Stock prices tick and lean into the future creating fluid motion: breakers, gentle eddies, deep pools—every current noted, recorded and measured.

    Baseball is the streak. The win streak. The losing streak. The no-hitter, and the individual game hitting streak. The market is the streak: Dow up in nine straight trading sessions (you can hear the crowd roar), The Dow closed down 11 straight days in a row (most of the crowd has left). Practically all NYSE listed stocks were down today (the home team just got their hitters embarrassed for a complete game shutout), once again only gold stocks moved up today as most every other issue failed to rally—the golds continued there winning session streak.

    The crowd loves to win. The fan is every-man buying his stock for the move—his game is on. He, like the others, wants and needs a win. Just take the series, just make this home stand count, just do what I know you should do and what the sportswriters say you should –come on guys!

    The announcer’s voice almost cracks as he cautiously mouths the statistic that with bases loaded the man at the plate has failed to get an RBI since he was traded to the current team last season. Is the announcer icing this guy, or is the announcer about to influence the future by speaking this magical incantation just before the 3-2 pitch? Why is the announcer saying this now? Is he crazy? But will that statistic stand up one more time and keep the streak?

    If I buy that stock will it go straight down like the last 2 times, especially now that it’s before earnings? If I buy into that sector will it stall out for 6 weeks and bore me to death like a sub 500 team, going no where in August?

    The statistics about baseball and about markets are the sand, the surf, the bubbles, and the sea air along the beach—it’s a framework in which we measure and ascertain the beauty and character of the great game, the great markets. How deep is the bench, or how deep are the funds for the oil sector? How quickly this team fizzled after their catcher got injured or how quickly this stock crashed after it was mentioned on Sunday.

    Manager of the year, now he’s a loser. All star in the regular season, dead in the playoffs. Batting leader suddenly goes cold. No hitter ruined by “excuse-me swing”. It’s the streak that keeps you guessing, hoping and cheering. I love baseball as much as I love markets. The statistics don’t make the future, the players do and the stocks tick, that’s why the games are played and the trades are made.

    And yes, that bum at the plate grounded to short, leaving the bases juiced to end the inning—just like we all knew he would, right?

  14. vic niederhoffer on June 13, 2009 11:41 pm

    The winner of the contest was the fastrunner and his award has been carried with a torch to him with his 100 relations thereby grabbing Larry Ritter's challenge by the beard and entitling him to know that the Doc's PhD was a gesture… Thanks to all who entered. Ken Drees's entry was a very beautiful and close second — and with a few numbers might have won. vic


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