Monday, December 14, 2009

Decision-making errors

(or "Why the Mirabelli re-acquisition was the worst decision of Epstein's tenure")

I made a post the other day in which I jokingly attributed a couple of Theo Epstein comments as a response to things that I wrote three years ago. Obviously, Theo hasn't a clue who I am or what I say, but it fit, and amused me, so I framed it that way. But there actually is a serious point that he addressed, and it is one that I've made before, and it seems about time to make it again.

All decisions must be evaluated on the information which is available at the time that the decision is made.

That's one of the reasons that I'm adamant about not second-guessing the manager after the result is known. I criticize a move, if I'm going to, before the next pitch is thrown. After that happens, the information available changes in such a way as to make it almost impossible to evaluate the decision. The informational asymmetry is that whatever happens, whatever it's ante-facto likelihood, seems like a post facto inevitability.

It is unavoidable. When the outcome is known, no matter how hard we try not to, we tend to evaluate the outcome of the decision, rather than the decision itself. And one of the primary results of that tendency is to introduce enormous amounts of "noise" into our ability to recognize decision failures, and improve decision-making processes.

But it is the decision, and the process that leads to the decision, that we want to evaluate. We went through a firestorm a month ago when Bill Belichick went for a first down in Indianapolis, and it revealed that there are a lot of people, many of them loud, a surprising large number of them with radio microphones, who aren't capable, or at least interested, in evaluating decisions, only results. And we can't do that.

As I said a few weeks ago, in the aftermath of that game,
An unlikely outcome can condemn a good decision, but cannot turn it into a bad one. It can redeem a bad decision, but cannot turn it into a good one.

This is obviously not a baseball, or football, or sports only, discussion. Decision-making is vital in all aspects of life. Here's Ramesh Ponnuru this past week, talking of Michael Gerson's defense of Mike Huckabee's clemency record:
...for Gerson's defense of Huckabee's record to work, we would have to have confidence in the process by which he made clemency decisions...

That's exactly right.

To illustrate what I'm talking about, lets consider a couple of ad absurdio situations. First, Tom, who takes empties his bank account and spends his life savings on lottery tickets. Next is Dick, who gets up at a reasonable time in the morning, eats a healthy breakfast, and goes to the gym before going to work.

I think it's fairly obvious to everyone that Tom has made a poor decision and Dick a good one. Agreed? Based on what we know at the time, Tom is squandering everything on a ridiculous long shot with almost no chance of success, Dick is behaving in a healthy and prudent fashion.

And then Dick gets hit by a bus and Tom wins PowerBall. What we're now looking at is one incredibly wealthy man, and a dead one. If we evaluate on results, well, Dick is a big loser and Tom a big winner. But when we look at their decisions, Tom was wrong and Dick was right.

Sometimes it happens. Bad decisions turn out well, good decisions turn out poorly. Rather than evaluating the results of decisions, we need to evaluate the process by which the decisions are made.

The word "process," in this context, tends to turn people off. Not only are we not as interested in processes as we are in results, we acknowledge it, and sometimes even brag of it. "I don't care how you do it, just get it done!" If we want a new car, we don't much care what the plant setup looks like. If we want a hamburger, we aren't interested in examining the knives at the abbattoir. And if we want a good baseball team, we don't much care what the GM's decision-making process consists of - we just want it to result in good players on the team.

But if you're evaluating a GM with an eye for what you can expect in the future, process is absolutely vital. How does he gather information? Which information is important to him? Where does he think his team is in the success cycle? How does he feel about free agency vs. trades? How much information does he gather? How does he use the information to make a decision?

There's far too much variation in human beings, baseball players and baseball player performance for anyone to get every trade or signing right. Every time you trade for someone else's asset, they're trading for one of yours. Every time you sign a free agent, you're valuing him higher than someone else did. No one wins them all, not all games, not all signings and not all trades. What's crucial for success is not that the GM keeps your favorite players or schmoozes the ad executives or sports radio personalities - it's that he has a rational process that works, that produces valid information, rational decision trees and maximizes potential while minimizing risk.

And that's where the Mirabelli trade is a disaster. As a decision. There have been many moves that worked out worse than that one. Bard wasn't much of a loss, Meredith's produced on the lower part of his expectations curve, and it just wasn't all that costly as a move. Not that Mirabelli provided much value, but he didn't have to for the trade not to be a disastrous result. The Julio Lugo signing probably cost the team more in terms of "baseball value." So, for that matter, did the Renteria signing and the Arroyo-Pena trade1.

None of those moves worked. Each of those moves resulted in a greater "negative value impact" on the organization than the Mirabelli re-acquisition. Indeed, there were people that hated each one at the time that it was made. But they are all defensible based on what we knew when they happened. The Mirabelli re-acquistion, on the other hand, demonstrated a significant failure in the decision-making process. They a) fixated on a short-term problem, b) overrated the significance of that problem, and c) responded to public panic. As a result, they gave up two young players with upside for an older player with none, and paid for the privilege. I believe it was the worst decision that Theo Epstein has made as GM of the Red Sox.

1 - There are still people that want to put the Drew signing on that list. Just smile and nod because those people are revealing to you a lot about exactly how they understand the game.

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