Best Business Books 2003: Human Capital
Business as Baseball(originally published by Booz & Company)
You can tell at once that Moneyball: The Art of Winning an Unfair Game, by Michael Lewis (W.W. Norton & Company, 2003), is not going to be one of those standard business books. It has no index. There are no references here to other authors, no case studies from model organizations, no fine theories or worthy checklists. Michael Lewis writes stories, true stories about real people, and he lets the stories speak for themselves. If there are messages in them for managers or businesspeople, they will have to work them out without his assistance.
For each of his books, Lewis has charmed his way into the culture of a very different world, and into the confidence of some riveting characters who inhabit that world. This, you feel as you read, is how it is; this is how these people think and work, these are the ambitions and passions that drive them, these are the conflicts that dog their lives. As observers of business, we can learn a lot by living with the characters revealed in the pages of Michael Lewis’s books, and by watching how they deal with the big and little problems of management.
In Liar’s Poker: Rising Through the Wreckage on Wall Street (W.W. Norton & Company, 1989), Lewis took the lid off the world of investment banking. In The New New Thing: A Silicon Valley Story (W.W. Norton & Company, 1999), he explored Silicon Valley and one of its more exotic residents — Jim Clark, who founded Silicon Graphics, Netscape, and Healtheon. In Moneyball, his latest book, he has visited the world of baseball and, in particular, the Oakland Athletics and Billy Beane, their general manager.
Baseball may be a sport, but it is also a business, a big business. Billy Beane had a problem that many a manager could empathize with — high ambitions for his team but only a tiny budget. Yet somehow, for the last several years, with the lowest or next-to-lowest payroll in the major leagues, the Oakland A’s won more regular-season games than any other team except the Atlanta Braves, went to the playoffs three years in a row, and in the previous two years took the richest team in baseball — the New York Yankees — to within a few outs of elimination. Moneyball is the story of how Billy Beane did it.
Baseball addicts will love the tale, will probably know the names of many involved, and will recall some of the key events. Others will be baffled at times by the jargon and the technicalities of the game, as was this British reviewer who was reared on the equally mysterious sports of cricket and rugby football but has never watched, let alone played, a game of baseball. But, as in most of life, while the technical bits may be critical, they are not the point. The point is Billy Beane’s realization that baseball teams are made, not bought.
That may not seem very revolutionary, but baseball is one of those businesses where the people truly are the assets and are priced as such. Every player has a market value that, in a relatively small and exclusive market, is known to all. In such a transparent market, it is reasonable for people to assume that the most expensive players are the best players, a situation that clearly favors the deepest pockets. Billy Beane dared to suggest that the market did not know best — and that was revolutionary.
Michael Lewis joined Billy Beane and his team of scouts in 2002 when they met to discuss the draft, which is the industrywide process of recruiting the new talent from high schools and colleges. Also present was a young Harvard graduate, Paul DePodesta, with his laptop computer. Paul distrusted irrationality in human affairs and believed that huge opportunities were open to those who resisted irrationality. He had never played baseball, but he believed that picking talent might be more interesting than picking stocks on Wall Street.
Traditionally, the selection of promising amateurs had been based on the subjective impressions of the scouts and on their views of what physique and talents made great players. Unsurprisingly, their views of what mattered were similar to those of the scouts of other teams, which meant that everyone ended up going for the same recruits — and inevitably failing to get all they wanted. To Billy, the draft was a crapshoot — “We take 50 guys and we celebrate if two of them make it. In what other business is two for 50 a success?” (Reading this, one has to wonder how many other businesses could even make the calculation.)
The fact was that no one had ever bothered to check whether college performance translated into a successful professional career. Intuitive assessments of potential ruled supreme. In baseball as elsewhere, Paul believed, there was a tendency for everyone who had actually played the game to generalize wildly from their own experience. Most important was the way the human mind played tricks on itself when it relied exclusively on what it saw. There was a lot that you couldn’t or didn’t see when you watched a baseball game. This provided nice opportunities to spot talent in a different way for anyone who could see through the illusion to the reality.
Measures That Matter
What Paul DePodesta discovered was a mine of numbers; numbers that had been around for years, collected by a strange brotherhood of amateur baseball enthusiasts. Numbers that nobody in major league baseball had paid any attention to. These sabermetrics, as they are called, demonstrated that the traditional clues to success for players and teams are fatally flawed.
The better clues, Paul reckoned, lay not in outward appearances or in style but in the statistics of the past performances of the amateurs, even if, as sometimes happened, the statistics suggested that the player would do better in a different role. That’s true, however, only if the numbers measure the right things. Too often they don’t. In baseball, as in many other businesses, many of the statistics and ratios were designed in an earlier age and no longer count what really matters.
Fortunately for Billy and Paul, a maverick baseball enthusiast who was working as a night watchman in a pork and beans factory had spent his nights calculating what ratios and numbers did reflect reality. His name was Bill James, and he is just one of the unusual characters who emerge in Moneyball. “You have to realize,” Bill James once said, “as soon as you acquire a taste for independent thought, that a great part of the sport’s traditional knowledge is ridiculous hokum.”
Mining the numbers allowed Billy Beane to pick players that nobody else bothered with, and to pay them far less than the more fancied players could command. It also, not incidentally, cut back the power of the scouts who, previously, had the only useful information on the new recruits. The Moneyball chapter describing the day of the 2002 draft is an absorbing picture of a power shift in process, the discomfort and, often, disbelief of the older scouts as the Oakland group decides to make an early offer to Jeremy Brown, who barely makes the bottom of the scouting lists. He is too fat and too slow, the scouts all say, and, at best, one of the rabble destined for minor league clubs.
That’s when Paul looks up from his computer and says: “He’s the only player in the history of the SEC with 300 hits and 200 walks.” It occurs to Billy at that moment that he could dispense with scouts altogether. Paul’s computer, stuffed with detailed records of all the games played at colleges across the country, can give him all the information he needs.
A Gifted Team Builder
The selection methods of the Oakland A’s make for some great human interest stories as the new recruits, often astonished by their recognition and selection by a major league club, begin to play. Although getting the right people to begin with is the first requirement of team building, the next, of course, is getting them to play well. Fortunately the Oakland A’s had a coach, Ron Washington, whose secret was a gift for making players want to be better than they were. Many of the new recruits had to be persuaded that they were as good as the statistics suggested they could be.
But some of them weren’t, and Billy could be ruthless. Those players who did not measure up were traded for others. Some were too valuable to keep. As with old wine, it is sometimes sensible to dispose of one of the best in order to acquire three not-so-good ones, and let them mature. On the other hand, these aren’t bottles — they’re human beings. Yes, “there’s a discomfort there,” comments Michael Lewis, but “Billy never lets it affect what he does. That’s why he trades them so well.”
And sometimes he does so spontaneously, which can be confusing for those involved. There is one scene in which the Cleveland Indians are playing the Oakland A’s. Billy has just negotiated a trade in which he acquires a Cleveland player named Ricardo Rincon. Billy leads Ricardo into the clubhouse and tells him to take off his Cleveland uniform and put on the new Oakland one. (The staff has just finished steaming his name onto the back).
The season ends in a mixture of bad news and good. Despite all the new metrics, the team loses to the Minnesota Twins in the playoffs, but Billy accepts a job offer from the Boston Red Sox for a guaranteed $12.5 million over five years, the most anyone has ever been paid to run a baseball team. The next morning he changes his mind. He doesn’t need the money, and now that everyone knows his true value, he doesn’t need the job either. He goes back to his real love — the Oakland A’s.
Why, however, one wonders toward the end of the book, would Billy Beane agree to let his methods be publicized here for all to imitate? Michael Lewis says it’s because Billy feels certain that most of the rest of baseball won’t adopt his methods even though he has been proved right. As Bill James wrote in the preface to his first published set of sabermetrics, “When I started writing I thought if I proved that X was a stupid thing to do that people would stop doing X. I was wrong.” Billy sees the sport as a closed world, self-populating, run by old baseball men who insist on doing things the way they have always been done.
That sounds all too familiar to anyone who has tried to make changes in his or her company, as does the reluctance of the old scouts to contemplate new ways of doing things. In most organizations, too, subjective impressions still play a large part in recruitment and assessment. Might there be a set of metrics somewhere that could give us a better way of measuring human performance? There are subtler messages, too, in this baseball tale: Numbers are valuable, but only if they are the right numbers; the traditional wisdom of an industry is often just hokum; the market may not always give the right signals; and, finally, as Billy discovered, money may not be the final measure of everything. Baseball may be a law unto itself, but the parallels to more familiar worlds of work leap out at you from every chapter of the story.
The book can also be read for enjoyment, for the character studies, the small dramas, and the thrill of the chase. There is, after all, no reason why learning can’t be fun.
Charles Handy (CandEHandy@aol.com) is a fellow of the London Business School and an author of many books about management. His latest is The Elephant and the Flea: Reflections of a Reluctant Capitalist (Harvard Business School Press, 2002). Mr. Handy was the subject of a recent strategy+business Creative Mind profile (Fall 2003).