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Freakonomics vs. Moneyball

On page 10 of the October 2nd issue of Business Week is a brief article by Peter Coy (not available online) entitled “Freakonomics vs. Moneyball.” Coy addresses an exchange between Steven Levitt – co-author of Freakonomics – and Raymond Sauer – Clemson economics professor and resident chief scholar at The Sports Economist. At issue is an article written by Sauer and Jahn Hakes-- and published this summer in the Journal of Economic Perspectives -- entitled “An Economic Evaluation of the Moneyball Hypothesis.”

Although it is hard to believe that one could be reading my words in this location and not know the Moneyball story, I will still offer a quick summary. The Oakland A’s consistently field a team towards the top in baseball in winning percentage. This very same team also consistently places towards the bottom in baseball’s payroll rankings. How is this possible? Michael Lewis – author of Moneyball – argued that Oakland was able to purchase cheap players with a high on-base-percentage because patience at the plate was a skill undervalued by other teams in Major League Baseball.

Steven Levitt disputed this claim, arguing that great pitching is the simple secret to Oakland’s success. Sauer and Hakes turned to the data and asked if on-base-percentage was truly undervalued in baseball’s labor market. Their paper reports that before Moneyball appeared, on-base-percentage was indeed undervalued. After this story became known, though, this advantage disappeared. In sum, baseball executives were able to adjust behavior in light of new information, a result standard economic theory would predict. Of course, why it took baseball more than a century to learn the lesson of plate discipline is still not quite as clear.

That point, though, is not the subject of Coy’s article in Business Week. Coy focuses solely on the debate between Levitt and Sauer. The Sauer-Hakes paper was originally submitted to the Journal of Political Economy where it was rejected by Levitt – who is a co-editor of JPE. This summer, as noted, it appeared in the Journal of Economic Perspectives, a journal Coy very erroneously refers to as a “not-quite-so-serious” journal. I would emphasize the “very erroneously” part of the last sentence. JEP is indeed a very good journal and appearing in such a forum is a feather in anyone’s cap.

Now one should note, as Coy mentions, that the Journal of Political Economy rejects 94% of papers submitted. So Levitt rejecting this paper does not indicate that the paper is necessarily flawed. In fact, after reading the paper I think the paper is clearly well-written and quite important.

Why is this paper important? The important issue is not why Oakland is successful. No, the bigger issue is that Sauer and Hakes found on-base-percentage – or the ability to draw a walk – was undervalued in baseball’s labor market. These stats have existed for decades and it is surprising that it took the publication of a best-seller to correct the market imperfection. Economic theory teaches us that decision-makers learn about their environment. Typically, though, we expect people in a highly competitive environment with abundant information to learn on their own. It should not be the case that learning only takes place after a best selling author highlights the problem.

The ability of decision-makers to understand the vast data collected in professional sports is one of the more important stories we can tell in sports economics. In essence, we are faced with the classic Watergate question: What do decision-makers know and when did they know it? In the sports of baseball, basketball, and football this question is being asked. And I think the answers – provided in papers like the recently published work of Sauer and Hakes -- not only inform our understanding of sports, but also of economics as well.