Whole New Game
Whole New Game
Joe Kesler | January 19, 2021 Humble Dollar
BASEBALL USED TO BE a game where managers would go with their “gut.” But Brad Pitt changed everything. In the movie Moneyball, Pitt played Billy Beane, the first baseball general manager to use data analytics to great success—and suddenly it was all the rage.
Today, from a typical game, seven terabytes of data are gathered, everything from the arm angle of every single pitch to the exit velocity of hit balls. Teams then interpret these numbers using sophisticated algorithms, so managers have the insights necessary to make decisions based on statistical probabilities rather than intuition. Big data analytics now drive baseball decisions on and off the field—because the process has proven to work.
The traditionalist in me revolts at this dehumanization of baseball. But the investor in me sees an opportunity to learn from baseball’s experience. I see two key lessons.
Lesson No. 1: Be aware of cognitive biases—especially the Dunning-Kruger effect. What’s that? People who are the most ignorant about a topic tend to be the least aware of their ignorance and, as a result, often have the highest confidence. Bad things usually happen when we suffer from overconfidence.
We can see evidence of this bias in the rising number of day traders. New apps have made it easy and fun to trade stocks and options. With the market hitting all-time highs, new traders have—I suspect—been lulled into thinking investing is easy.
The media feeds into this belief. We’re bombarded with headlines like “8 Stocks to Buy and 5 to Sell,” making successful investing seem as simple as reading a monthly investment magazine.
I learned about investing by watching the popular PBS show Wall Street Week with Louis Rukeyser. The highlight of the show came at the end of the year, when the stock pickers would wear tuxedos and be either exalted or humiliated based on how their stock picks had performed that year. They would then confidently offer stocks for the next year, persuasively explaining why the new picks would be winners.
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