Moneyball - Michael Lewis [63]
IN THE EARLY 1980S, the U.S. financial markets underwent an astonishing transformation. A combination of computing power and intellectual progress led to the creation of whole new markets in financial futures and options. Options and futures were really just fragments of stocks and bonds, but the fragments soon became so arcane and inexplicable that Wall Street created a single word to describe them all: “derivatives.” In one big way these new securities differed from traditional stocks and bonds: they had a certain, precisely quantifiable, value. It was impossible for anyone to say what a simple stock or bond should be worth. Their value was a matter of financial opinion; they were worth whatever the market said they were worth. But fragments of a stock or bond, when you glued them back together, must be worth exactly what the stock or bond was worth. If they were worth more or less than the original article, the market was said to be “inefficient,” and a trader could make a fortune trading the fragments against the original.
For the better part of a decade there were huge, virtually risk-less profits to be made by people who figured this out. The sort of people who quickly grasped the math of the matter were not typical traders. They were highly trained mathematicians and statisticians and scientists who had abandoned whatever they were doing at Harvard or Stanford or MIT to make a killing on Wall Street. The fantastic sums of money hauled in by the sophisticated traders transformed the culture on Wall Street, and made quantitative analysis, as opposed to gut feel, the respectable way to go about making bets in the market. The chief economic consequence of the creation of derivative securities was to price risk more accurately, and distribute it more efficiently, than ever before in the long, risk-obsessed history of financial man. The chief social consequence was to hammer into the minds of a generation of extremely ambitious people a new connection between “inefficiency” and “opportunity,” and to reinforce an older one, between “brains” and “money.”
Ken Mauriello and Jack Armbruster had been part of that generation. Ken analyzed the value of derivative securities, and Jack traded them, for one of the more profitable Chicago trading firms. Their firm priced financial risk as finely as it had ever been priced. “In the late 1980s Kenny started looking at taking the same approach to Major League baseball players,” said Armbruster. “Looking at the places where the stats don’t tell the whole truth—or even lie about the situation.” Mauriello and Armbruster’s goal was to value the events that occurred on a baseball field more accurately than they ever had been valued. In 1994, they stopped analyzing derivatives and formed a company to analyze baseball players, called AVM Systems.
Ken Mauriello had seen a connection between the new complex financial markets and baseball: “the inefficiency caused by sloppy data.” As Bill James had shown, baseball data conflated luck and skill, and simply ignored a lot of what happened during a baseball game. With two outs and a runner on second base a pitcher makes a great pitch: the batter hits a bloop into left field that would have been caught had the left fielder not been Albert Belle. The shrewd runner at second base, knowing that Albert Belle is slow not just to the ball but also to the plate, beats the throw home. In the record books the batter was credited with having succeeded, the pitcher with having failed, and the left fielder and the runner with having been present on the scene. This was a grotesque failure of justice. The pitcher and runner deserved to have their accounts credited, the batter and left fielder