Tuesday, March 28, 2006

Better living through market inefficiencies

I'm not much of a basketball fan, but I was entertained by this Slate article about how George Mason has built its basketball team and economics department using the same techniques:

GMU has excelled on the court and in the classroom by daring to be different. Its basketball team and academic programs began with the (correct) assumption that they couldn't hope to compete against the top schools in their fields—say, Harvard Law School or the Duke Blue Devils—by directly imitating their methods. GMU lacks the resources and reputation to recruit McDonald's All-Americans or Alan Dershowitzes. So instead, GMU has hunted for inefficiencies in its markets. Coach Jim Larranaga follows the Moneyball model of recruitment: hunting for the undervalued players—the ones who everyone else thought were too short, too thin, or too fat—and then building them into a team. In its astonishing defeat of UConn, GMU's players were giving away 4 inches at nearly every position.

Picking undervalued players wouldn't be possible if the market for jocks worked perfectly. In an efficient market, jocks—like stocks—should be valued no more nor no less than what they are actually worth. So, why isn't the market efficient?

One reason is that coaches who take chances on oddball players risk making themselves look foolish. A coach who goes after the same jock that everyone else wants, or an investment analyst who picks the same stock that everyone else recommends, at least can't be made to look worse than average. Herd behavior means that unpopular opportunities remain unexploited. An unusual coach who's willing to look unfashionable with the in-crowd has a chance to excel.

This is also the idea behind GMU's free-market-oriented economics department. The department got started with a heretical premise: The academic market is inefficient, so how can we exploit it? GMU knew it couldn't afford to be a first-class MIT and didn't want to be a second-class MIT, so successive chairs of the department, backed by entrepreneurial university presidents George Johnson and Alan Merten, looked for unexploited opportunities.

James Buchanan, GMU's first Nobel Prize winner, has never had an Ivy League position and indeed he has never taught above the Mason-Dixon Line. Gordon Tullock, a potential future Nobelist, has no degree in economics and took only one class in the subject. Vernon Smith, who moved his team from the University of Arizona (again, no Harvard) to GMU in 2001, had to fight to get people to treat experimental economics as more than a cute parlor game.

This particularly entertains me since it's not that different to how I picked production staffs when I was producing theater as an undergrad. There was always gnashing of teeth among the board of the theatre club about the shortage of skilled technicians, but I always liked making offbeat choices -- particularly ones that didn't make sense unless you rethought what, say, a technical director's job really consisted of -- that usually worked out really well. And the people recruited that way were usually more likely to bring their A game, because they were so pleased to be asked to do something no one else thought they could do. Who knew I was onto something? Not me, that's for sure...

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