Compensation at the right tail

Yesterday I was reading this article ($) about how Liverpool FC is going about (not) retaining its star forwards Sadio Mane and Mo Salah, who have been key parts of the team that has (almost) “cracked it” in the last 5 seasons.

One of the key ideas in the (paywalled) piece is that Liverpool is more careful about spending on its players than other top contemporary clubs. As Oliver Kay writes:

[…] the Spanish club have the financial strength to operate differently — retaining their superstars well into their 30s and paying them accordingly until they are perceived to have served their purpose, at which point either another A-list star or one of the most coveted youngsters in world football (an Eder Militao, an Eduardo Camavinga, a Vinicius Junior, a Rodrygo and perhaps imminently, an Aurelien Tchouameni) will usually emerge to replace them.

In an ideal world, Liverpool would do something similar with Salah and Mane, just as Manchester City did with Vincent Kompany, Fernandinho, Yaya Toure, David Silva and Sergio Aguero — and as they will surely do with De Bruyne.

But the reality is that the Merseyside club are more restricted. Not dramatically so, but restricted enough for Salah, Mane and their agents to know there is more to be earned elsewhere, and that presents a problem not just when it comes to retaining talent but also when it comes to competing for the signings that might fill the footsteps of today’s heroes.

To go back to fundamentals, earnings in sport follow a power law distribution – a small number of elite players make a large portion of the money. And the deal with the power law is that it is self-similar – you can cut off the distribution at any arbitrary amount, and what remains to the right is still a power law.

So income in football follows a power law. Income in elite football also follows the same power law. The English Premier League is at the far right end of this, but wages there again follow a power law. If you look at really elite players in the league, again it is a (sort of – since number of data points would have become small by now) power law.

What this means is that if you can define “marginal returns to additional skill”, at this far right end of the distribution it can be massive. For example, the article talks about how Salah has been offered a 50% hike (to make him the best paid Liverpool player ever), but that is still short of what some other (perceptibly less skilled) footballers earn.

So how do you go about getting value while operating in this kind of a market? One approach, that Liverpool seems to be playing, is to go Moneyball. “The marginal cost of getting a slightly superior player is massive, so we will operate not so far out at the right tail”, seems to be their strategy.

This means not breaking the bank for any particular player. It means ruthlessly assessing each player’s costs and benefits and acting accordingly (though sometimes it comes across as acting without emotion). For example, James Milner has just got an extension in his contract, but at lower wages to reflect his marginally decreased efficiency as he gets older.

Some of the other elite clubs (Real Madrid, PSG, Manchester City, etc.), on the other hand, believe that the premium for marginal quality is worth it, and so splurge on the elite players (including keeping them till fairly late in their careers even if it costs a lot). The rationale here is that the differences (to the “next level”) might be small, but these differences are sufficient to outperform compared to their peers (for example, Manchester City has won the league by one point over Liverpool twice in the last four seasons).

(Liverpool’s moneyball approach, of course, means that they try to get these “marginal advantages” in other (cheaper) ways, like employing a throw in coach or neuroscience consultants).

This approach is not without risk, of course. At the far right end of the tail, the variance in output can be rather high. Because the marginal cost of small increases in competence is so high, even if a player slightly underperforms, the effective monetary value of this underperformance is massive – you have paid for insanely elite players to win you everything, but they win you nothing.

And the consequences can be disastrous, as FC Barcelona found out last year.

In any case, the story doing the rounds now is that Barcelona want to hire Salah, but given their financial situation, they can’t afford to buy out his contract at Liverpool. So, they are hoping that he will run down his contract and join them on a free transfer next year. Then again, that’s what they had hoped from Gini Wijnaldum two years ago as well. And he’s ended up at PSG, where (to the best of my knowledge) he doesn’t play much.

Reliving my first ever cricket match

Earlier this week, I came cross the recent Sky Sports documentary “spin wash” – about England’s 3-0 Test series defeat in India in 1993. That’s a rather memorable series for me, since it was the first time that I actually saw India win, and win comfortably (I had started watching cricket on my ninth birthday, with the 126-126 tie at Perth).

Prior to the series I remember chatting with an “uncle” at the local circulating library, and he asked me what I thought would happen to the series. I had confidently told him that England would win comfortably. I was  very wrong.

Anyway, one video led to another. I finished the series, and then remembered that it was during the same tour that I had gone for my first ever cricket match. It was an ODI in Bangalore, either the 3rd or the 4th of the series (depending on whether you count the first ODI in Ahmedabad that got cancelled). This came just after the “spin wash” and the expectations from the Indian team were high.

A granduncle who was a member at the KSCA had got us tickets, and my father and I went to see the game. I remember waking up early, and first going to my father’s office on his scooter. I remember him taking a few printouts in his office (a year earlier he had got a big promotion, and so had both a computer and a printer in his private office), and then leaving me there as he went upstairs to drop it off in his manager’s (the finance director) office.

Then we drove to the ground in his scooter. I don’t remember where we parked. I only know there was a massive line to get in, and we somehow managed to get in before the game began. I also remember taking lots of food and snacks and drinks to eat during the game. While entering the group, I remember someone handing over large “4” placards, and cardboard caps (the types which only shaded the eyes and were held at the back by a string).

Anyway, back to present. I searched for the game on YouTube, and duly found it. And having taken the day off work on account of my wife’s birthday, I decided to watch the highlights in full. This was the first time I was watching highlights of this game, apart from the game itself that I watched from the B stand.

Some pertinent observations about the video, in no particular order:

  • The outfield was terrible. You see LOTS of brown patches all over the place. When you see Paul Jarvis come in to bowl, you see a very reddish brown all over his trousers – you don’t really see that colour in (even red ball) cricket now
  • There was a LOT of rubbish on the outfield. Random paper and other things being thrown around. Remember that this was prior to the infamous 1999 game against Pakistan in Bangalore where the crowd threw lots of things on to the pitch, so I’m not sure there was anything to prevent things from being thrown on the pitch
  • The India shirt was sponsored by some “Lord and Master”. I don’t remember at all what that is. Never seen its ads on TV (and I watched a lot of TV in the 1990s).
  • There was a hoarding by the Indian Telephone Industries (state owned telephone manufacturing monopoly that collapsed once the monopoly was broken) that said “allrounders in communications”. I found it funny.
  • There were lots of hoardings by the local business Murudeshwar Ceramics / Naveen Diamontile. The business still exists, but it’s interesting that a local player got hoarding space – I guess TV wasn’t yet a big deal then
  • There was a hoarding by “Kuber finance”. I found that interesting since we’ve almost come a full circle with “Coinswitch Kuber” ads during the 2021 IPL.
  • The Bangalore crowd looked MASSIVE on TV. and the Sky Sports commentators kept referring to how big a crowd it was. Coming soon after Test matches in Calcutta, Madras and Bombay, this is “interesting”.
  • Every time the camera panned towards the B stand in the highlights reel, I tried to look for myself (I was 10 years old at the time of the game!). No success of course. But I do remember stuff like Srinath getting his 5-41 bowling from “our end” (BEML End, going away from where I was sitting). And Sidhu fielding right in front of us at third man when India was bowling from the pavilion end
  • I remember leaving the ground early after India collapsed (from 61-1 to 115-7). I remember my father saying that there would be riots once the match finished and we should get out before that. One of my school classmates who also went to the game said he watched till the very end and I was jealous of him.
  • The highlights showed Mexican waves. I clearly remember enthusiastically participating in those
  • This was 3.5 years before the famous Kumble-Srinath partnership in Bangalore against Australia but from the highlights I see that Kumble and Kapil Dev had started one such partnership in this game. Again I remember none of it since I had left the ground by then.
  • I’ll end with a poem. I had written it on the day of the game, on the back of the “4” placard I had been given while entering the ground, and waving it every time it seemed the camera was facing my section of the crowd.

Graeme Hick
You’ll get a kick
From a mighty stick
And you’ll fall sick

He ended up top scoring in the game.

Slip fielding meetings

It’s been nearly six months since I returned to corporate life. As you might imagine, I have participated in lots of meetings in this period. Some of them are 1-on-1s. Some are in slightly larger groups. Some meetings have big groups.

Meetings in big groups are of two types – ones where you do a lot of the talking, and what I have come to call as “slip fielder meetings”.

Basically, participating in these meetings is like fielding at slip in a cricket match. For most of the day, you just stand there doing nothing, but occasionally once in a while a ball will come towards you and you are expected to catch it. That means you need to be alert all the time.

These meetings are the same. For most of the discussion you are not necessarily required, but once in a while there might be some matter that comes up where your opinion is required, and you need to be prepared for that.

I can think of at least two occasions in the last six months where I was rudely awoken from my daydreams (no I wasn’t literally napping) with someone saying “Karthik, what do you think we should do about this?”.

And since then I’ve learnt to anticipate. Anticipate when my presence might be required. Figure out from the broad contours of the conversation on when I might be called upon. And remain alert when called upon (though on one occasion early on in the company my internet decided to give way just when I had started talking in a 20 person meeting).

Yesterday, a colleague gave me a good idea on how to stay alert through these “slip fielder meetings”. “Just turn on the automated captions on Google Meet”, he said. “Occasionally it can be super funny. Like one day ‘inbound docks’ was shown as ‘inborn dogs'”.

I think this is a great idea. By continuously looking at the captions, I can remain sufficiently stimulated and entertained, and also know what exactly is happening in the meeting. I’m going to use this today onwards.

I now wonder what real slip fielders do to stay alert. I’m not sure chatting with the wicketkeeper is entertaining enough.

The Law is an Ape

I’ve always known that I have long arms relative to the size of the rest of my body. I think I discovered this sometime in the late 90s, around the time I both stopped growing vertically and started wearing full arm shirts. I remember being forced to buy shirts one size too large for my shoulders because otherwise the sleeves wouldn’t reach all the way down.

My father had the same problem as well, and so he wore shirts one size too large as well. Over time, I managed to find brands that fit both my shoulders and my arms properly (the Aditya Birla stable is good for this -Loius Phillippe, Van Heusen, etc. Arrow never fits me). And then I took to getting my formal shirts tailored. Last year I bought a bunch at Gap, after I found that they fit me well.

Only recently, while I was trying to analyse my performances at the gym, that I realised that my long arms might be affecting stuff apart from my attire as well. For the longest time now, I’ve been trying to learn to power clean, and have never quite managed it.

The power clean involves, among other things, holding the bar with your arms outstretched where it touches the fold in your waist (where your torso meets your groin). The idea is that as you pull the bar up past your thighs, you make it touch the fold in your waist while performing a “triple extension” and jumping, and that will power the bar up.

And I recently discovered that I can’t make my bar touch the fold of my waist unless I hold it really really wide, like you do for a snatch. “Maybe I have long arms”, I thought, and then remembered my troubles with buying shirts.

And then I started wondering if I could quantify if I actually had long arms. Looked around a little and found that there is the concept of the “wing span” or “arm span“. I figured how to measure it, and got my wife to measure it for me. It’s 192 cm. My height is between 179 and 180 cm. This means my arm span is 12-13 cm, or nearly 5 inches longer than my height.

Most humans have their arm spans about the same as their height, or just a little longer. According to this article, my long arms mean that I could have been an elite basketball player or a swimmer, since these sports are good for people with long arms. That perhaps explains why I was a decent defender in basketball in school, though I was among the least athletic people you could find.

I kept looking, and reading articles. I thought of myself as being “the Law” (long arms, get it?). And then I came across this measure where rather than subtracting your height from your arm span, you take the ratio. The ratio of your arm span to your height is called “ape index“.

Most humans have an ape index close to 1. NBA players have an average ape index of 1.06. My ape index is higher than 1.07. Shortly after she had measured my arm span, I told my wife about this. “Well, I always knew you were an ape”, she said.

So yes, for my height I have really long arms. This means I find it hard to buy shirts that fit me. This also means I find it relatively easier to deadlift. Long arms also mean that I find movements where I have to lock out my hands upwards, like the bench press or the overhead press, really difficult. Maybe this explains why I have piddly bench and overhead numbers compared to my squat or deadlift? Long arms also make it harder to do pull ups, which possibly explains why completed my first ever pull up in life at 37.

You could think I am the law. You could also think I am an ape. Or maybe, the law is an ape?

The first heart attack

Gerard Houllier is no more. The man who led Liverpool to the “cup treble” in 2001 passed away following a heart operation. Supporters of the club might remember that he had had yet another heart operation when he was managing Liverpool, and the impact of that heart attack on the club was serious.

I’m reusing a graph that I’d put here a couple of years back. This shows Liverpool’s Elo Rating (as per clubelo.com) over the years, with managers’s reigns being overlaid on top.

Notice the green region towards the right – it says “Houllier”, and it has one massive up and one massive down. Actually I’m going to re-upload this graph to blow up the Premier League period.

Liverpool’s Elo Rating in the Premier League period

Now you can see that there are two separate regions marked “Gerard Houllier”, with a small gap that says “Phil Thompson”. This gap represented Houllier’s first heart operation. Notice how, before his heart operation, Liverpool had been on a massive upswing, on their way back nearly to the levels where they had started off in the Premier League (they had last won  the league in 1990; compare to the first graph here).

And then the heart attack, and heart operation happened. Houllier’s assistant Phil Thompson took over and held things (here is Thompson’s tribute to Houllier). And then Houllier came back and he and Thompson became joint managers (the “orange” region here). And Liverpool’s rally was gone. The 2001-2 season was gone.

Looking at this graph, with the full benefit of hindsight, Houllier’s sacking in 2004 (to be replaced by Rafa Benitez) seems fully justified. And then notice the club’s steep fall under Benitez after Xabi Alonso got sold in 2009.

I’ve said here before – these Elo graphs can be used to tell a lot of footballing stories.

Yet another initiation

I’m still reeling from the Merseyside derby. It had been a long time since a game of football so emotionally drained me. In fact, the last time I remember getting a fever (literally) while watching a game of football was in the exact same fixture in 2013, which had ended 3-3 thanks to a Daniel Sturridge equaliser towards the end.

In any case, my fever (which I’ve now recovered from) and emotional exhaustion is not the reason today’s match will be memorable. It also happens to be a sort of initiation of my daughter as a bonafide Liverpool fan.

 

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Initiating @abherikarthik to the Merseyside derby. #ynwa #lfc

A post shared by Karthik S (@skthewimp) on

It’s been a sort of trend in recent times (at least since the lockdown) that Liverpool games have been scheduled for late evenings or late night India times.  That has meant that I haven’t been able to involve the daughter, who on most days goes to bed at seven, in the football.

She has seen me watch highlights of Liverpool games. She admires the “Liverpool. We are Champions” poster that I had ordered after last season’s Premier League victory, and have since stuck on the walls of our study. She knows I’ve been a fan of Liverpool for a long time now (it dates to more than eleven years before she was born).

However, till date, after she had truly started understand stuff (she is four now), we had never watched a game together. And so when it was announced that the Everton-Liverpool game would be held at 5pm IST, I decided it was time for initiation.

I had casually slipped it to her on Tuesday (or so) that “on Saturday, we will be watching football together. And we will have drinks and snacks along with it”. And then on Wednesday she asked me what day of the week it was. “So how many days to Saturday”, she asked. When I asked her what was special about the coming Saturday, she let out a happy scream saying “football party!!”. On the same day she had informed her mother that we both were “going to have a football party on Saturday”, and that her mother was not welcome.

She’s spent the last three days looking forward to today. At four o’clock today, as I was “busy” watching the IPL game, she expressed her disappointment that I had not yet started preparing for the party. I finally swung into action around 4:30 (though a shopping trip in the morning had taken care of most of the prep).

A popcorn packet was put into the microwave. The potato chips packet (from a local “Sai hot chips” store) was opened, and part of its contents poured into a bowl. I showed her the bottles of fresh fruit juice that I had got, that had been pushed to me by a promoter at the local Namdhari’s store. Initially opting for the orange juice, she later said she wanted the “berry smoothie”. I poured it into a small wine glass that she likes. A can of diet coke and some Haldiram salted peanuts for me, and we were set.

I was pleasantly surprised that she sat still on the couch with me pretty much for the length of the match (she’s generally the restless types, like me). She tied the Liverpool scarf around her in many different ways. She gorged on the snacks (popcorn, potato chips and pomegranate in the first half; nachos with ketchup in the second). She kept asking who is winning. She kept asking me “where Liverpool was from” after I told her that “Everton are from Liverpool”.

I explained to her the concept of football, and goals. Once in the second half she was curious to see Adrian in the Liverpool goal, and that she “hadn’t seen the Liverpool goal in a long time”. Presently, Dominic Calvert-Lewin equalised to make it 2-2, giving her the glimpse of the goal she had so desired.

At the end of the game, she couldn’t grasp the concept of a draw. “But who won?”, she kept asking. She didn’t grasp the concept of offside either, though it possibly didn’t help that Liverpool seemed to play a far deeper line today than they have this season.

I’m glad that she had such an interesting game to make her “football watching debut”. Not technically, of course, since I remember cradling her on my lap when Jose Mourinho parked two Manchester United buses at Anfield (she was a month old then), and that had been a dreadful game.

A friend told me that I should “let her make her own choices” and not foist my club affiliations on her. Let’s see where this goes.

 

Kneel down

When Colin Kaepernick knelt down during the national anthem, it was cool, and a strong sign of protest against racial violence in the United States. When other athletes, in the US and elsewhere decided to copy him (and did so on their own volition), it was cool as well.

What I find not so convincing is that after the Floyd murder earlier this year, sports organisations across the world decided to institutionalise the kneel down. When the English Premier League restarted after the covid-19 induced break, it was decided that all players and referees would kneel for a minute at kickoff.

Now it seems like it has been decided that the gesture will continue for the 2020-21 season as well – players and officials will take a knee for a minute at the beginning of each game. Of course, it has also been decided to make it “non-mandatory” – players who choose not to not join the protest will be free not to kneel.

The problem with the institutionalisation of the protest is that the protest loses its information content. Prior to the institutionalisation in June, if a player knelt, he/she was making a statement that he/she believed that “black lives matter”. Now that kneeling has become standard practice, there is no way for a player to convey this information.

Alternatively, it is possible now for a player to send out the opposite information (that he/she doesn’t believe in this protest) by refusing to join the protest. However, given the PR repercussions of such a move, it is unlikely that any player is going to take that stance (no pun intended).

Actually – by institutionalising the kneel, the protest level is getting changed, from individual players to leagues. I can see why the protest is going to be continued – it will be a continuing statement by the sporting leagues that they believe in the cause. However, individual players will not have the opportunity to show their protest (or dissent) any more.

I also wonder if and when this protocol is reversed, since it takes effort for some team or league to “bell the cat”. Even saying that “this is mere symbolism” is bound to attract wrath of protestors elsewhere, so teams are all caught in a Nash equilibrium where they continue to kneel down in protest.

And the longer this kneeling down protest continues, the more the meaning that it will lose. Rather than serving to make a statement, it will end up as yet another ritual.

Front Five, Back Five

I recently realised that there are two ways in which you can describe a team’s formation in football. The traditional way is to describe it in terms of the number of defenders, midfielders and attackers. 4-4-2 and all that (speaking of which, I don’t think I’ve mentioned here at all about The Paper, a new venture I’ve started with Suprio Guha Thakurta, where we dissect one piece of India business news every day. Subscribe here if you aren’t yet a subscriber. In yesterday’s edition, we used Inverting The Pyramid to describe India’s National Education Policy).

Back to football, so you can describe teams as 2-3-5, or 4-4-2, or 4-2-3-1, or whatever. However, in the last few months, maybe since Jose Mourinho took over at Spurs, I’ve discovered another way of describing a football team. It’s not that elegant, I must admit, and it takes more effort to describe it. This is what I call the “back five, front five” method.

In his early days at Spurs, Jose sort of surprised us by the way he set up the team. We all expected a 4-3-3 (or even a 4-2-3-1) given his history. It was still a nominal 4-2-3-1, but it was highly asymmetrical. Right back Serge Aurier was given license to attack, while left back Ben Davies stayed back. So the “front five” (players responsible for attack) were centre forward Harry Kane, wide left forward Heung Min Son, the attacking midfielders Dele Alli and Lucas Moura, and Aurier.

In other words, it was the 3-1 of the 4-2-3-1 and the right back that constituted the front five for Spurs under Jose. The remaining two defenders and two defensive midfielders were the “back five”, responsible for holding the position when the front five went on attack.

Now, Jose has tweaked his formation several times after this, but once I had seen this front five back five description, I couldn’t “unsee” it. Every team’s formation fit nicely into a front five and a back five.

Liverpool and Manchester City both play with nominal 4-3-3s, but that doesn’t tell you how different these teams are in the way they attack. Well, for both, the front line of three are all attackers, but the interesting thing is who joins them.

For Liverpool, it is the full backs Trent Alexander Arnold and Andy Robertson. The job of the entire midfield is to be part of the back five (though they do join attacks in turns), which makes their job very different from similar midfielders at other clubs. Check out this statistic, for example:

Manchester City (and Guardiola’s Bayern Munich before them) do it differently. For them, all the back four are part of the back five, assisted by one of the midfielders. The other two midfielders (most commonly, Kevin De Bruyne and David Silva in the last two seasons) are part of the attack (Pep  calls them “twin eights”).

Manchester United struggled for most of the season, trying out different formations and not being particularly good at it until they landed Bruno Fernandes in the winter break. That, along with the emergence of “wide striker” Mason Greenwood meant that they’ve since adopted a front-back policy similar to their City rivals. The resurgence after the pandemic break was spectacular.

So think about it – the reason nominally similar formations might play very differently, or why nominally different formations produce similar styles of play, is that they interpret the front five and back five differently. Maybe it doesn’t work for all teams, but this is a good framework to describe teams.

Scrabble

I’ve forgotten which stage of lockdown or “unlock” e-commerce for “non-essential goods” reopened, but among the first things we ordered was a Scrabble board. It was an impulse decision. We were on Amazon ordering puzzles for the daughter, and she had just about started putting together “sounds” to make words, so we thought “scrabble tiles might be useful for her to make words with”.

The thing duly arrived two or three days later. The wife had never played Scrabble before, so on the day it arrived I taught her the rules of the game. We play with the Sowpods dictionary open, so we can check words that hte opponent challenges. Our “scrabble vocabulary” has surely improved since the time we started playing (“Qi” is a lifesaver, btw).

I had insisted on ordering the “official Scrabble board” sold by Mattel. The board is excellent. The tiles are excellent. The bag in which the tiles are stored is also excellent. The only problem is that there was no “scoreboard” that arrived in the set.

On the first day we played (when I taught the wife the rules, and she ended up beating me – I’m so horrible at the game), we used a piece of paper to maintain scores. The next day, we decided to score using an Excel sheet. Since then, we’ve continued to use Excel. The scoring format looks somewhat like this.

So each worksheet contains a single day’s play. Initially after we got the board, we played pretty much every day. Sometimes multiple times a day (you might notice that we played 4 games on 3rd June). So far, we’ve played 31 games. I’ve won 19, Priyanka has won 11 and one ended in a tie.

In any case, scoring on Excel has provided an additional advantage – analytics!! I have an R script that I run after every game, that parses the Excel sheet and does some basic analytics on how we play.

For example, on each turn, I make an average of 16.8 points, while Priyanka makes 14.6. Our score distribution makes for interesting viewing. Basically, she follows a “long tail strategy”. Most of the time, she is content with making simple words, but occasionally she produces a blockbuster.

I won’t put a graph here – it’s not clear enough. This table shows how many times we’ve each made more than a particular threshold (in a single turn). The figures are cumulative

Threshold
Karthik
Priyanka
30 50 44
40 12 17
50 5 10
60 3 5
70 2 2
80 0 1
90 0 1
100 0 1

Notice that while I’ve made many more 30+ scores than her, she’s made many more 40+ scores than me. Beyond that, she has crossed every threshold at least as many times as me.

Another piece of analysis is the “score multiple”. This is a measure of “how well we use our letters”. For example, if I start place the word “tiger” on a double word score (and no double or triple letter score), I get 12 points. The points total on the tiles is 6, giving me a multiple of 2.

Over the games I have found that I have a multiple of 1.75, while she has a multiple of 1.70. So I “utilise” the tiles that I have (and the ones on the board) a wee bit “better” than her, though she often accuses me of “over optimising”.

It’s been fun so far. There was a period of time when we were addicted to the game, and we still turn to it when one of us is in a “work rut”. And thanks to maintaining scores on Excel, the analytics after is also fun.

I’m pretty sure you’re spending the lockdown playing some board game as well. I strongly urge you to use Excel (or equivalent) to maintain scores. The analytics provides a very strong collateral benefit.

 

Shooting, investing and the hot hand

A couple of years back I got introduced to “Stumbling and Mumbling“, a blog written by Chris Dillow, who was described to me as a “Marxist investment banker”. I don’t agree with a lot of the stuff in his blog, but it is all very thoughtful.

He appears to be an Arsenal fan, and in his latest post, he talks about “what we can learn from football“. In that, he writes:

These might seem harmless mistakes when confined to talking about football. But they have analogues in expensive mistakes. The hot-hand fallacy leads investors to pile into unit trusts with good recent performance (pdf) – which costs them money as the performance proves unsustainable. Over-reaction leads them to buy stocks at the top of the market and sell at the bottom. Failing to see that low probabilities compound to give us a high one helps explain why so many projects run over time and budget. And so on.

Now, the hot hand fallacy has been a hard problem in statistics for a few years now. Essentially, the intuitive belief in basketball is that someone who has scored a few baskets is more likely to be successful in his next basket (basically, the player is on a “hot hand”).

It all started with a seminal paper by Amos Tversky et al in the 1980s, that used (the then limited) data to show that the hot hand is a fallacy. Then, more recently, Miller and Sanjurjo took another look at the problem and, with far better data at hand, found that the hot hand is actually NOT a fallacy.

There is a nice podcast on The Art of Manliness, where Ben Cohen, who has written a book about hot hands, spoke about the research around it. In any case, there are very valid reasons as to why hot hands exist.

Yet, Dillow is right – while hot hands might exist in something like basketball shooting, it doesn’t in something like investing. This has to do with how much “control” the person in question has. Let me switch fields completely now and quote a paragraph from Venkatesh Guru Rao‘s “The Art Of Gig” newsletter:

As an example, take conducting a workshop versus executing a trade based on some information. A significant part of the returns from a workshop depend on the workshop itself being good or bad. For a trade on the other hand, the returns are good or bad depending on how the world actually behaves. You might have set up a technically perfect trade, but lose because the world does something else. Or you might have set up a sloppy trade, but the world does something that makes it a winning move anyway.

This is from the latest edition, which is paid. Don’t worry if you aren’t a subscriber. The above paragraph I’ve quoted is sufficient for the purpose of this blogpost.

If you are in the business of offering workshops, or shooting baskets, the outcome of the next workshop or basket depends largely upon your own skill. There is randomness, yes, but this randomness is not very large, and the impact of your own effort on the result is large.

In case of investing, however, the effect of the randomness is very large. As VGR writes, “For a trade on the other hand, the returns are good or bad depending on how the world actually behaves”.

So if you are in a hot hand when it comes to investing, it means that “the world behaved in a way that was consistent with your trade” several times in a row. And that the world has behaved according to your trade several times in a row makes it no more likely that the world will behave according to your trade next time.

If, on the other hand, you are on a hot hand in shooting baskets or delivering lectures, then it is likely that this hot hand is because you are performing well. And because you are performing well, the likelihood of you performing well on the next turn is also higher. And so the hot hand theory holds.

So yes, hot hands work, but only in the context “with a high R Square”, where the impact of the doer’s performance is large compared to the outcome. In high randomness regimes, such as gambling or trading, the hot hand doesn’t matter.