The trouble with economics is that many things that work in practice don’t work in theory (and vice-versa, of course). That is why it is entertaining to read a recent analysis of Michael Lewis’s “moneyball” theory, which seemingly worked so well in the real world of baseball that you would have bet it would fall apart under the harsh light of econometrics. But contrary to my expectations, the stuff holds up:
An Economic Evaluation of the Moneyball Hypothesis
JAHN KARL HAKES
Clemson University – John E. Walker Department of Economics
RAYMOND D. SAUER
Clemson University – John E. Walker Department of Economics; National Bureau of Economic Research
November 3, 2004
Michael Lewis’s book, Moneyball, is the story of an innovative manager who exploits an inefficiency in baseball’s labor market over a prolonged period of time. We evaluate this claim by applying standard econometric procedures to data on player productivity and compensation from 1999 to 2004. These methods support Lewis’s argument that the valuation of different skills was inefficient in the early part of this period, and that this was profitably exploited by managers with the ability to generate and interpret statistical knowledge. This knowledge became increasingly dispersed across baseball teams during this period. Consistent with Lewis’s story and economic reasoning, the spread of this knowledge is associated with the market correcting the original mis-pricing.