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Bad Tactics in Baseball

Bad Tactics: Baseball & the Boardroom

“At the opening of the 2002 season, the richest [baseball] team, the New York Yankees, had a payroll of $126 million while the two poorest teams, the Oakland A’s and the Tampa Bay Devil Rays, had payrolls of less than a third of that, about $40 million.”

For the Oakland A’s the exact number was $41,942,665. Oakland won 103 games that regular season, while the Texas Rangers had only won 72 and spent $106,915,180. This phenomena was somewhat common actually. Many of the richest teams in Major League Baseball were not delivering results while the Oakland A’s were… consistently.

Let’s look at this another way. Teams have to spend a minimum of $7 million on payroll and a team that’s spending the minimum payroll is expected to win about 49 games during the 162 game season. So, on a dollar-per(-marginal)-win basis the A’s were spending about $650,000 per win while Texas was spending about $4.3 million for each win. What explains this nearly 7x delta in ROI?

The two word answer is simple: Bad Tactics.

Traditional Tactics

Baseball is a sport steeped in tradition and the decade preceding the 2002 season saw teams payrolls rise by tens of millions of dollars per team, up to a 400% increase. These new costs meant that more people were paying attention to how effectively this money was being spent.

In 2002, the vast majority of MLB scouts were still judging players by whether they had a “good face” and by the 5 Tools – running, throwing, fielding, hitting, and hitting power. These subjective metrics were used in place of the enormous data sets that baseball had been collecting since the invention of the box score in 1845.

The data was clear. In 2002, RBIs (runs batted in), stealing bases, bunts, batting average, slugging, foot speed, high school players (vs college), and old (vs new/fresh) pitching arms were all tremendously over-valued in players – and it showed in their salaries.

The following were underpriced: High pitches per at-bat – which wore down pitchers – walks, and any other activity that got a hitter on base instead of out. So despite the availability of the data, the statistics to make sense of it, and the computing power to crunch the numbers, looks and luck were still being priced over results.

The human mind played tricks on itself when it relied exclusively on what it saw, and every trick it played was a financial opportunity for someone who saw through the illusion to the reality.

Baseball teams simply insisted on using bad tactics – which of course amounts to bad strategy. But reliance on knowably bad tactics happen outside of baseball too.

Insider vs Outsider CEOs

A recent episode of the Freakonomics podcast (How to Become a C.E.O.) illustrates another example of reliance on subjective decision making when good, relevant data is available:

A 2009 academic study, which analyzed established public companies from 1986 to 2005, found that internally promoted C.E.O.’s led to at least a 25 percent better total financial performance than external hires.” A 2010 study by Booz & Company similarly found that, in 7 of the 10 previous years, insider C.E.O.s delivered higher market returns than external hires. And yet: external hiring seems to be on the rise: in 2013, between 20 and 30 percent of boards replaced outgoing C.E.O.’s with external hires; a few decades ago, that number was only 8 to 10 percent. Outside hires also tend to be more expensive: their median pay is $3 million more than for inside hires. So, an external hire will, on average, cost you more and perform worse. And yet that’s the trend.

Overpay & Underdeliver

Why do companies overpay for inferior results? Why do baseball teams?

I think the biggest reasons is fear. The fear of humiliation and failure drove both baseball management and corporate boards into the bad tactics of over-paying for inferior results. When you focus on avoiding failure instead of finding success, you’re less likely to see new opportunities and adapt.

There’s also an issue of misaligned incentives at work too. In baseball, owners and managers care more about not being embarrassed by their performance than about wins. A losing team can still be profitable and have a great return. In the business world, board members and CEOs are often scratching one another’s backs and giving one another high paying jobs instead of focused on increasing shareholder value.

And, of course, it’s not always clear who’s delivering value, who’s slacking, or who’s just getting lucky or unlucky – in both a corporate environment and on the baseball diamond.

Recognizing Bad Tactics

So how do you recognize bad tactics?

1) Define what’s important to you.

For boards, they want CEOs who will deliver returns for a fair price. For baseball teams, regular season wins are the key to having a shot at the world series.

2) Look at the data & try to understand how different actions affect the outcomes you care about.

If there’s no data or bad data, start investing in this area. Try to put a value on different skills or results (on-base percentage, walks, or market-cap). How are different variables connected? What’s currently undervalued and what’s overvalued?

3) Ask hard, even contrarian, questions and seek out different perspectives.

Challenge the norms within your sector, culture, or league. Don’t be different just to be different but understand that the standard approach – or even your entire industry – might be severely under-optimized. Seeing reality through the illusion is incredibly valuable.

4) Be honest with yourself.

Embrace your findings. Act on them. Yes, that probably means risking failure.

Moneyball

I was inspired to write this post after reading Michael Lewis’ Moneyball. While I haven’t been a baseball fan since I was about 9 years old, listening to Bill James (one of the key players in all of this) on Russ Robert’s EconTalk got me really excited about the story of the Oakland A’s 2002 season – which was made into a very popular movie as well. I highly recommend reading Moneyball – which uses baseball as an analogy for the tactical and strategic failings of many organizations.

The Strategist’s Guide to Buying a Diamond Engagement Ring

There are a lot of great reasons not to buy a diamond so this article assumes that you’ve already decided to buy a diamond and are looking for the appropriate strategy for making the right purchase. What follows is the result of many dozens of hours of research that I did for my fiancée’s engagement ring. So while this content is catered to diamond engagement rings, the advice is applicable to loose diamonds, earrings, and necklaces as well.

The Objective

The objective is simple: Purchase the best-value diamond within your budget.

But our strategy – a well-aligned set of activities that result in a valuable position within a competitive landscape – is less straightforward.

In this case, we’re competing against the diamond industry as a whole and diamond retailers specifically. Buying a diamond is also competing with all of the other things that consume your time, energy, and brainspace. The position that you want to occupy when you’re ready to purchase is unemotional, well-educated, outcome-focused, patient, confident, and prepared to make tradeoffs.

If you just want to get something to put on your fiancée’s finger and don’t care about value or cost, then employ the same strategy that most guys do: Ask your future sisters-in-law or mother-in-law to guess about “what she likes.” Then ask your guy friend who was most recently engaged where he got his ring. Go to his recommended jeweler with a budget in mind and do your best not to spend twice as much as you’d hoped. You’ll have the ring within a few days so you can pop the question and you can have it properly sized to her finger a few weeks later. This is a solid strategy for checking all the boxes, especially if you don’t want to invest the time and energy to get something high value.

However, if you want to understand my strategy for getting a high-value diamond within your budget, keep reading.

Make Smart Choices

Because diamonds are so expensive, buying the right one is a decision worth taking seriously. It’s important to choose to make the most rational decision you can now, before you face the enormous emotional, marketing, and societal forces that you’re about to encounter. It’s critical to understand how the cards are stacked against you so that you can put yourself in the best position to achieve our objective.

Emotional Decision Making

Think about a large & important financial decision you’ve only made once or twice in your life – where to go to college, which job to take, which car to buy, which apartment to rent, or which house to buy. Now imagine complicating that decision by coupling it to a second enormously emotional decision: whether to spend the rest of your life with someone or not.

That is the emotional state most people have when they walk into their local jeweler, and it’s why so many people get ripped off buying diamond engagement rings. If your only criteria for buying a diamond is the love in your heart, then you will likely buy something you can’t afford and isn’t very spectacular.

Emotions are a critical part of the decision-making process. In fact, people who have had the emotional centers of their brains removed or damaged struggle to make straightforward decisions like what to have for lunch.

So my advice is to be objective and rational where you can be (diamond X is objectively better than diamond Y) and do your best everywhere else to make decisions you won’t regret (especially regarding budget).

Overcoming Marketing Half-truths

You’re not going to be able to escape a century of diamond propaganda but you can acknowledge that nearly everything you know about diamonds was probably told to you by the very people who sell diamonds – people who want your money more than they want their diamonds.

Diamonds Are Forever

Advertising Age called the 1948 “Diamonds are Forever” marketing campaign the greatest marketing campaign of the 20th century.

The De Beers company has had brilliant marketing like this for nearly a century, and the very fact that you’re even considering a diamond engagement ring is proof. Diamond engagement rings weren’t popular until the 1930s, and the primary success of their marketing campaigns is rooted in convincing women that men don’t love them unless they buy them a big diamond ring. Entangling love and diamonds encourages emotional decision making, which makes the diamond industry more money.

“When you’ve found the woman of your dreams, give her the diamond of her dreams. Two months’ salary guideline helps you find a diamond of quality, brilliance and breath-taking beauty.” (De Beers, 2001. Source: magazine-advertisements.com)

Oh, and diamonds are definitely not forever – In reality they’re quite brittle and easy to lose.

This excellent video humorously paints the picture of “why engagement rings are a scam …but you’ll still end up buying one.”

The 4 Cs (That Jewelers Want You To Ask About)

We’ll talk extensively about the famous “4 Cs” – Cut, Clarity, Color, and Carat – but you need to know up front that the 4 Cs are a marketing meme created to help sell more diamonds. By getting just a little education about diamonds (from the diamond industry), people feel empowered to make a great decision. The 4 Cs were also a way to improve the sales of smaller diamonds since jewelers could highlight other features aside from the mass and size of their diamonds. It’s genius and it’s made the industry countless billions of dollars.

Budget

The “5th C” when evaluating a diamond is cost. But how much should you spend on a diamond engagement ring? Don’t worry, diamond advertisers have the perfect answer for you: 2 months salary. Or was it 3? Surely your love for her is worth at least a few months of your income – I mean, you are going to spend the rest of your lives together.

The marketing and advertising history of diamonds is fascinating and would make an excellent case study for me to do. If you’re curious, learn more here:

Of course, focusing exclusively on the cost of the diamond is the wrong answer anyway. It’s better to set a budget for the entire ring and then figure out how you want to allocate that between the different components of the finished product.

The easiest way to spend more money than you want to on an engagement ring is to not have a budget. Before you even look at diamonds, you must set an initial budget. That means you’re going to have to sit down and look at your finances and make a decision about what you can afford and what you’d like to spend.

I recommend picking a number you’re not willing to spend more than and then subtracting 20% from that number to create a range. Make it clear to anyone you talk to about budget that you are not willing to go even 1 penny over that upper number – all in. And don’t forget about the cost of the ring, any fees associated with setting stones, taxes, any sort of customs fees if that’s applicable, and annual insurance. It’s also okay to spend less than your range – something that might happen if you take the time to do your homework.

But how do you pick an amount? All I can offer you is a few tips and things to think about:

    • There is no formula and anyone that has one is probably trying to sell you something.
    • A diamond ring is a luxury purchase and should only be made if you have the disposable income to afford it.
    • Generally speaking, going into debt to buy a luxury good is a horrible decision.
    • Diamonds are a terrible investment so don’t even think about the resale value (which, FYI, will definitely be less than 70% of whatever you pay).
    • The cost or size of the diamond does not represent how much you love someone.
    • How much is too much? How much would cripple your joint finances? You should probably spend way less than that.
    • If you’re buying an engagement ring, remember that you’re planning to spend the rest of your lives together. You’re going to have plenty of opportunities in the future to buy her jewelry or even upgrade her ring.
    • Will she wear the ring everyday? If not, then you might decide to spend less money since she’ll be getting less value from the ring. This is a conversation I’d have explicitly with your fiancée.
    • Try to translate the expense into the terms of another luxury good. What else might you spend this money on? For example, how many days of your favorite vacation might a ring be equivalent to? What would that cost?
    • How much is too little? That number may be $0, but you may also feel good about making a financial sacrifice as a symbol of your love.
    • If you’re worried that you are budgeting too much, then you probably are.
    • Once you pick a total number, write it down or tell a friend. Having someone else to hold your future self accountable to the decision your current self is trying to make responsibly can relieve a ton of stress down the line.

What Really Matters

Imagine yourself 5 or 10 years into the future and look back on the moment that you’re currently in. What’s going to really matter to you and your fiancée when you think back? Will it be how much you spent? How big the diamond is? The exact details of how you asked her?

I know it’s not as romantic and not as big of a surprise, but if you can both go get educated together and have a few frank and open conversations about an engagement ring, you’re much more likely to get a ring you’ll both happy with long term. After doing some research together you may even find out that you don’t want a diamond at all – which will save you a ton of money and anxiety.

I asked my fiancée to marry me fairly spontaneously in the middle of a crazy art and music festival in the high deserts of Nevada (Burning Man), so I hadn’t purchased a ring yet. We just used another ring she was already wearing while I got my act together and bought her engagement ring.

She said yes! (Sept 1, 2017, Black Rock City. Honey Bear by fnnch)

As a result, we were able to take a few weeks, get educated, visit a jeweler, and I bought a diamond ring that we both love. And it was another big surprise when I gave her the ring.

It’s ok to feel resistance about the idea of proposing without a ring – it’s exactly what we’ve been told to feel. But also know that involving your fiancée is an option too and that whether the whole thing is a huge surprise or you’ve tried on some rings together, all these scenarios have their own tradeoffs and sacrifices.

At the end of the day, this is about the two of you, not anyone else. So do it your way.

Understanding Value

Like most industries I study, one of the very first things I learned about the diamond industry was how much there was to learn – about the industry, it’s history, and diamonds themselves. Things are further complicated by the fact that no two diamonds are exactly the same – they’re all technically unique. And while their unique status doesn’t necessarily increase or decrease their value (oranges and snowflakes are all unique too), it does complicate the process of assessing and comparing diamonds and their prices.

There are a lot of relevant variables for diamonds. In addition to cut, clarity, color, & carat (“the 4 Cs”), there’s certification, and shape, which is often confused with cut. And then there’s the ring itself – the material, color, and design of the setting. I cover all of these, and more, in detail in another piece so that we can remain focused on strategy here.

The point is that there’s a lot to consider when purchasing a diamond and if you don’t have a solid understanding of what gives a diamond value, then you’re almost certainly going to get a bad deal.

Buying a Low-value Diamond

If you’re buying a diamond for an engagement ring, then you probably value things like the meaning it has as a symbol of your commitment to one another and the signal it sends to your families, friends, and broader community. It’s also usually a gift, which carries value in itself. An engagement ring might also represent a sacrifice one person is making – a display of disposable income. The value of these things is primarily dependent on the person.

But there’s one thing that almost all people value about diamonds: their beauty. And a diamond’s beauty is entirely created by the quality and quantity of light leaving the diamond and hitting our eyes.

Fortunately for us, the beauty of a diamond is fairly objective once you leave the carefully crafted lighting environment of the jewelry store.

Many diamonds are objectively bad. Dull, yellow, and obviously flawed diamonds are not very pretty but they’re still expensive – low value, high cost. These are the worst diamonds you can buy but they’re also the easiest to buy. Usually, these diamonds are objectively bad because they are cut to minimize the waste when cutting the rough diamond and so major sacrifices are made to the geometry of the diamond.

Cut geometry is the worst place to cut corners for high quality brilliant diamonds that look great outside of the hundred thousand dollar light system of the showroom floor. Rough diamonds aren’t interesting at all to look at. It’s only once they’ve been cut and polished that diamonds look gorgeous. While cutting them in optically non-ideal ways may mean that there’s more diamond to sell, there’s not necessarily more that can be seen once the diamond has been set.

The other piece of good news is that there’s a limit to what the human eye can and can’t see and that threshold can be partially defined in terms of certain variables. Buying diamonds with features that are substantially above those visible thresholds is a waste of money.

So, going back to our objective – to help you purchase the best-value diamond within your budget – we want to find diamonds that are just barely above the thresholds that make them as pretty to our eyes as possible.

In the 2nd part of this article, I detail guidelines for what and where the thresholds are for each of the key variables that make diamonds visually attractive – so we can spend our limited budget on the features we can actually see and enjoy.

Buying the Wrong Diamond for You

While some diamonds are objectively bad because of certain variables, other variables are more a matter of personal preference.

The ring’s style, setting, and color are all areas where you’ll want to understand your fiancée’s preferences. In addition to knowing the ring’s characteristics – which may affect what diamond you’ll get – you’ll want to know what shape diamond your future-fiancée wants.

To do this, I highly recommend taking your future fiancée to go try on rings together at a high-end retailer. Not only will you have the perfect opportunity to get her ring size accurately measured but you’ll also get to see a lot of styles, shapes, and sizes side by side.

And, of course, you might avoid buying the worst diamond that you could possibly buy: the diamond that you didn’t need to buy.

Decrease Disadvantages

Information Asymmetry Disadvantage

Information asymmetry is an economic concept where one party in a transaction has more or better information than the other. Let’s say that Schmartha Fluert, the famous television personality and homemaker, finds out that the Food and Drug Administration (FDA) is going to announce tomorrow that a biopharmaceutical company, KloneCo, is not going to have their new drug approved for public use. If Schmartha Fluert were to attempt to sell her shares of KloneCo before the FDA made this information available to anyone else, the Securities and Exchange Commission (SEC) might call this “insider trading.” I would call it an excellent (and purely hypothetical) example of information asymmetry because the seller, Schmartha, has important information that buyers don’t have.

While buying a diamond from a jeweler is similar to buying Schmartha’s KloneCo shares, there are 2 main differences: 1) There are laws against what Schmartha allegedly did and 2) Schmartha’s information was truly a secret while information about the diamonds you’re considering is much more knowable. That means that while you’re not really protected from shady diamonds retailers (“buyer beware”), you can educate yourself so that you can avoid bad deals.

Finally, buying an engagement ring is not something you do every day. But selling engagement rings is something that jewelers do every day. You are at an inherent disadvantage in the jewelry buyer-seller relationship – both in terms of the information you have and the experience you have at the bargaining table.

The follow-up to this article and the additional resources I’ve put together contain the minimum information you need to help overcome this information asymmetry.

Beware False Confidence

But don’t get over-confident. No matter how much you research, you’ll probably never have more expertise or knowledge than the seller. Worse yet, once you’ve learned a little about diamonds and rings (usually the basics of the “4 Cs” from your local, overpriced jeweler), it’s easy to fool yourself into thinking you know enough to make an educated decision.

So arm yourself with as much information as you can, don’t be afraid to go to retailers multiple times to extract knowledge and prices from them. Just be sure not to be seduced by your jeweler, who will work their hardest to make you like and trust them.

Beware of Diamond Decision Fatigue

Decision fatigue “refers to the deteriorating quality of decisions made by an individual after a long session of decision making.”

Because of the overwhelming volume of novel information that’s going to be thrown at you and the number of decisions you’ll be asked to make when selecting a diamond, “Diamond Decision Fatigue” can leave you open to being manipulated into buying something you don’t understand or want.

Purchasing a diamond isn’t meant to be easy. But avoid the temptation to simply trust whatever jeweler is in front of you when you’re most exhausted. So when you find yourself suffering from Diamond Decision Fatigue and don’t want to get ripped off: stop and take a break.

Buy from the Correct Retailer

There are only a handful of places to buy diamonds: low-end jewelers, high-end jewelers, estate sales, antique stores, resale marketplaces, online, and – of course – your “friend’s buddy” who will give you the “best deal” in town.

While every diamond is technically unique, diamonds are commodities. The vast majority of diamonds are also fungible, or nearly fungible. An item is fungible if it’s units are interchangeable. Pure gold, for example, is fungible. 1 gram of gold in a Swiss vault is interchangeable with a gram in Ft. Knox. Money is also fungible. Your $10 bill is completely interchangeable with 2 of my $5 bills. Once gasoline has been certified to be of a certain grade, it’s fungible too.

While diamonds aren’t exactly fungible, most diamonds are more-or-less interchangeable. Some rare diamonds, like the most famous diamond in the world – the Hope Diamond – are definitely not fungible. Not only is the diamond exceptionally rare because of it’s unique blue color and enormous size (although there are at least 2 cuts diamonds that are 10 times more massive), it’s history makes it irreplaceable.

But since you’re not in the situation to buy an irreplaceable diamond, you can rest assured that any diamond you buy could be interchanged with another similar diamond.

We’re going to use these facts – that diamonds are both unique but semi-fungible – to our advantage.

Middlemen

Whether we’re talking about diamonds, beer, or mattresses, the more middlemen who stand between the manufacturer and the end customer, the more markup a product will have. These middlemen all need to make a profit and you and I are the ones who foot the bill. That’s why companies like Casper are popping up to sell amazing mattresses directly to customers – disrupting the expensive, inefficient, and capital intensive retail showroom distribution channel.

Middlemen – Showroom floors of mattress and jewelry. (Sources: rileysfurniture.com, jasonsjewelrync.com)

Unfortunately for beer lovers like myself, prohibition-era (late 1920s) laws require that brewers and distillers sell their product to distributors, who mark up the product while adding little or no value, and then sell it to retailers, who then mark it up again and sell it to you and me.

The exact same thing is true for diamonds – the more middlemen there are, the more expensive the end product is going to be for you and me. But, unlike the alcohol industry, there aren’t any laws requiring distributors in the supply chain.

So if you’re looking for to buy a high-value diamond for as little money as possible, one of the best things you can do is to get educated and purchase from one of the reputable online retailers. These online retailers can make a healthy profit while charging you substantially less than brick and mortar jeweler – just like the online mattress companies. And because they don’t have to hire pushy salesmen to stand in their fancy stores, you don’t have to deal with gross sales tactics either.

So as not to make this strategy article too long or too much of a sales piece, I’ve written a separate piece about why you should buy your diamond online.

Final Thought

I want to share one final thing about this entire process that was a surprise for me: I’ve spent dozens of hours doing the initial research, making a purchase, and then researching and writing and publishing about 10,000 words of content. I’ve looked at hundreds of diamonds in person and online – with my naked eye, at 10x, 20x, and even 60x. I understand the structure of the diamond industry, it’s disgusting little corners, and gross history. I understand the economics and I understand that the diamond I bought isn’t unique in any meaningful way.

Once I started getting deep into this process, I got worried that I was going to become totally jaded about diamonds.

But after all that, whenever I think about or see my fiancée’s ring, it really does feel like that little polished clear stone has something magical about it. I know this is just my brain tricking itself – because I’m the one who knows exactly how to find 15 diamonds exactly like it. But it’s a trick I’m happy to fall for – especially since I was able to have the discipline not to fall for it during the buying process. Even though we value the beauty of our diamond, ultimately, it’s the symbol and meaning behind the ring that’s really special to my fiancée and me. And if her ring ends up taking on some of our love for one another, I’m okay with that.

Bottom Line: The strategy for buying a diamond (engagement ring) is:

    • Commit to making a good decision
    • Understand the value of diamonds generally and their value to you specifically
    • Dramatically reduce your information asymmetry disadvantage by doing your homework
    • When you’re ready, buy from the right retailer
    • Stick to your budget

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