Counterpoint Global Insights

Turn and Face the Strange

Overcoming Barriers to Change in Sports and Investing

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Player evaluation and skill building are essential to the success of any sports organization. The ability to apply

analytics to talent evaluation varies based on factors such as whether the action is discrete or has interaction,

whether the sport itself has continuous play or stops and starts, the length of the season, and the sample size

of scoring opportunities.

In superstar sports, such as the National Basketball Association (NBA), the top 3 players, 20 percent of the

roster, can earn two-thirds or more of the total payroll. In the National Football League (NFL), quarterbacks are

the top 10, and 13 of the top 15, paid players.

Building a roster is a lot like building a portfolio. Teams would like to sign players with a value higher than their

price. Concentrating the payroll on a few players is akin to having an undiversified portfolio, with higher risk and

higher potential reward. Managers must dynamically assess the constituents because their prices and value

change all of the time. And elements such as turnover and time horizon are vital contributors to results.

The first question to ask in any organization is: what contributes to winning? Managers should seek to answer

this analytically, which will lead to certain types of players, strategies, and tactics. For many teams, the response

Nobel Prize in Economics, gave a talk at the MIT Sloan Sports Analytics Conference titled “The Sports Learning

Curve: Why Teams are Slow to Learn and Adapt.” He reviewed a number of strategies that have been shown

to be effective analytically but that teams have been slow to adopt. Examples include reducing the rate of bunts

and base stealing in Major League Baseball (MLB), increasing the rate of 3-point shots in the NBA, and going

for it on fourth down in the NFL.

Peak performance is important because this is big business. The average MLB (MLB) franchise is worth $1.9

billion, the average NBA franchise $2.2 billion, and the average NFL franchise $3.5 billion.

And winning is a

factor that contributes to franchise value.

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In the 1979/80 season, the NBA introduced a line behind which a player would score three points, rather than

two, for a made shot.

The line is 23.75 feet from the basket, except in the corners, where it is 22 feet away in

order to accommodate the court’s 50-foot width.

The shot was a novelty. Larry Bird, one of the NBA’s all-time greatest players, said, “It’s strange when you think

back. I can’t remember even practicing the shot, unless it was for the [annual 3-point shooting] contest. I really

didn’t take that many, compared to today.”

2-point attempts succeeded close to half of the time for an expected value of 0.99. Today, even the teams with

the worst 3-point shooting percentage make more than one-third of their long-range shots.

Source: Sports Reference LLC, " NBA League Averages-Per Game," Basketball-Reference.com-Pro Basketball Statistics

Over time, the combination of skill identification and practice made it clear that 3-point shots could have an

attractive expected value. Players improved their shooting percentage from that range, and 3-pointers finally

had a higher expected value than 2-pointers about a dozen years after the initiation of the line (see exhibit 2).

This is the point at which it became clear that 3-point shots were an opportunity.

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The inefficiency associated with the 3-point shot has now been largely competed away. But it turns out there

may be new frontiers in basketball where analysis suggests an approach that is different than the conventional

wisdom. One illustration is the strategy and tactics of offensive rebounding. An offensive rebound is when a

team gains possession of the ball after it misses a shot, which extends the possession and resets the shot clock

rebounds. One coach’s message to his perimeter players was, “We don't care if you get an offensive rebound

in your entire life.”

Exhibit 5 shows a steady decline in the percentage of rebounds secured by the offense.

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It is important to acknowledge that most teams in professional sports have made substantial strides in the right

direction.

decision making. Here are some of the impediments to better decisions:

tend to avoid situations where we can be potentially wrong. This is especially relevant when the decision

runs against conventional wisdom.

of winning.

Paul DePodesta, a protagonist in the book Moneyball and now the chief strategy officer for the Cleveland

Browns of the NFL, says that owners indicate that “we want this disciplined approach to what we’re doing.

But then when it comes time to making that hard decision, they say, ‘I don’t want any part of this.’”

He compares the decision-making process, with its inevitable successes and failures, to riding on a big

and terrifying roller coaster. He discusses the ideal owner: “I need someone who’s going to want to get on

the roller coaster with me knowing that it's not always going to be fun. There are going to be parts of the

in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness;

and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly

wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

We posit that teams and organizations are willing to experiment with new approaches when they have

been very unsuccessful or highly successful (see exhibit 6). Loss aversion is less of an issue following a

stretch of failure because there is little room to get worse. Consistent with this is the notion that underdogs

should try new and unusual strategies in order to increase variance when they compete with a stronger

team that is the favorite to win.

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Source: Counterpoint Global. For illustrative purposes only.

Winning teams are also freer to experiment because they have accumulated goodwill with the fans, media,

and owners that provides cover for greater risk-taking. Take the example of Bill Belichick, the head coach

of the New England Patriots and one of the winningest coaches in NFL history. Belichick has been able

to pursue the proper strategies on the field without worrying about career risk because his success has

provided him with job security. He was more conventional when he was the head coach of the mediocre

Cleveland Browns, where he won just 45 percent of his games.

and select the one with the highest value. However, research shows that people have a bias in favor of

losses and decision makers prefer to do nothing because the potential losses loom larger than the gains.

Decision makers and onlookers tend to treat the outcomes of inaction as neutral and regard the outcomes

of action as positive if they are perceived to be better than inaction and negative if they are worse than

the counterfactual associated with doing nothing.

One of the psychological challenges with innovation, especially in sports, is that prior teams that have

been successful have not used the new techniques. Morey points out that coaching is like a guild, with

perceived wisdom passed from one generation to the next. This also shapes player training. Trying new

approaches, even if supported analytically, goes against past success, conventional wisdom, and what

The endowment effect describes the tendency to value what you have higher than something equivalent

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team’s payroll. One analysis of the NFL showed that teams overvalued players on the roster when they

extended their contracts or resigned them relative to when they acquired free agents (albeit both had

negative expected value).

In economics, a sunk cost is one that has been incurred and is unrecoverable. Proper decision making

ignores sunk costs and focuses on the future. But teams struggle to do that. For example, NBA teams

analytics don’t work all the time. The key idea is that when drawing a sample from a population of

outcomes, there is large variation in small sample sizes and small variation in large sample sizes.

result, even when something is correct to do on average, small sample sizes can have outcomes far from

average, sowing doubt for believers and nonbelievers alike.

Exhibit 2, which shows that 3-point shots have a higher expected value than 2-point shots, is based on

the success rate of roughly 1.4 million 3-point attempts and 6.5 million 2-point tries. The results can vary

a lot from the averages over any stretch of a game, for a complete game, or even for a series. For instance,

Steph Curry, one of the greatest shooters in the history of the NBA, made 13 of his 17 3-point attempts in

to consider a sufficient sample of outcomes.

Regression toward the mean tells us that in cases where the firing is because of poor luck, the team will

do better after the change independent of the coaching decision. An analysis of the four major sports in

the U.S. shows that teams improve after a coaching change.

One of the most important lessons for decision making is that when both skill and luck contribute to the

outcome, you should assess the quality of the decision based on the process by which it was made rather

But a focus on process is essential for at least two reasons. The first is practical: over the long run, a good

process leads to good outcomes. The key insight is that sometimes an organization can make the correct

strategic or tactical decision but have an outcome that is unsatisfactory as the result of bad luck. This

happens in a world of uncertainty, where the desired outcome occurs only some percentage of the time.

In these cases, the organization must have the fortitude to stick with the decision-making framework.

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This report focused on what contributes to wins in sports and the barriers to change that make teams slow to

adopt those strategies. But the concepts apply to all organizations where the results of decisions occur with

some probability. Here are some observations about what investment management organizations can do to

cadences. Renaissance Technologies, which seeks small gains on frequent trades, and Berkshire

Hathaway, which looks for large profits on a relatively small number of investments, have been successful

over time.

Identifying edge is crucial both because it provides a basis for active management, and the sources of

edge can change over time. Similar to sports teams, sources of edge explain why a process is likely to

work in the long term.

organization to the perceived source of edge. The goal is to make all activities within the firm congruent

with the espoused method to succeed.

But both approaches, no matter the turnover of the securities in the portfolio, require a long-term

orientation. The reason is that the ratio of signal to noise is very low in the short run and reveals itself only

over the long run.

There is research that supports this point. For example, active share, a measure of how different a portfolio

is relative to its benchmark, has been increasing since the financial crisis (see exhibit 10). Funds that

combine high active share and low turnover deliver excess returns on average.

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Source: Antti Petajisto, see www.petajisto.net/data.html; Martijn Cremers, “Active Share and the Three Pillars of Active

Management: Skill, Conviction and Opportunity,” Financial Analysts Journal, Vol. 73, No. 2, Second Quarter 2017, 61-79;

Counterpoint Global.

Most of us learn to associate effort with results. In investing, effort is better described as thinking than as

acting. This is true for individuals and institutions. Similar to many other activities in life, investing can be

described as “hours of boredom punctuated by moments of terror.” Limited activity for long-term investors

tends to be the best course. At times, the market presents opportunities for action. But on balance, doing

less can leave an investor with more.

maximize performance given the constraints of the system. In investing, the landscape continuously

changes. This includes the evolution of businesses, the nature of investment management, and the profile

of investors. As a result, successful investors have little choice but to learn. This means being willing to

ask naïve questions and to be mindful of the pitfalls of status quo bias. In investment management, reading

is probably the best way to acquire knowledge. As Charlie Munger, vice chairman of Berkshire Hathaway,

has said, “I don’t think you can get to be a really good investor over a broad range without doing a massive

amount of reading.”

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Successful organizations seek to learn and adapt over time in order to enable quality decisions. Good long-term

results require developing strategies and tactics that add value and having an ability to execute them. An

effective decision-making framework combines both elements.

One of the main lessons from this discussion is that organizations can be slow to adopt certain approaches even

when analysis reveals that they add value. Reasons for this include the fact that losses often feel worse than

comparable gains and the inclination to maintain the status quo. But perhaps the biggest factor is that in any

to do so is to have organizational alignment behind a commitment to improvement, learning, transparency, and

accountability.

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Antonio Dávila, Sports Business Management: Decision Making Around the Globe, Second Edition (New York:

Management, Vol. 27, No. 3, Spring 2001, 11-15.

Atul Gawande, The Checklist Manifesto: How to Get Things Right (New York: Metropolitan Books, 2009).

strategies and tactics that seeks to generate excess returns. Talent is very important. Firms can hire investors

out of school (draft) or hire them from other firms (free agency). Successful firms have congruence between

their investment process, people, and objectives.

George Foster, Norm O’Reilly, and Zachary Naidu, “Playing-Side Analytics in Team Sports: Multiple Directions,