The new Moneyball

The Dodgers and Boston Red Sox made what was the largest trade in MLB history, at least in nominal value. Most of the analytical wisdom was that the Red Sox did well to dump Josh Beckett and Carl Crawford’s contracts on the Dodgers along with Adrian Gonzalez’s since the Red Sox also received four prospects in return, with two of them in Rubby De La Rosa and Allen Webster being arguably the two best pitching prospects in their system. Josh Beckett hasn’t displayed his former dominant stuff this year, or in recent years, and Crawford hasn’t just been a disappointment since he signed with the Red Sox, but he just had Tommy John surgery.

However, as I noted recently, I agree with Jay Caspian Kang on the absurdity of lauding owners of our favorite sports teams for being frugal. What the Dodgers did, and what they’ve indicated they will continue to do under their new ownership, is spend like mad, luxury tax be damned. Instead of the old Oakland A’s Moneyball strategy of finding cheap, inefficiently priced assets, the Dodgers will pay top dollar for more proven commodities. It’s more akin to the Yankees strategy in the past two decades.

Owning sports franchises has been a great investment for a long time now. Despite cries of poverty from owners when it comes to renegotiating collective bargaining agreements with the players, almost every baseball franchise that has sold in recent years has sold for far more than it was purchased for. So don’t be fooled. The owners cry poverty, but it's a negotiating tactic to extract even greater control over their largest cost: payroll. Unlike other vanity investments like financing movies, owning a sports team is a lucrative game.

So why, as fans, should we feel sympathy when our favorite sports’ team’s owner claims poverty and slashes payroll, trading or letting go of some of its best players? If I were a Dodgers fan, the only concern I’d have is if this deal with the Red Sox meant Dodgers ownership wouldn’t resign other assets like Clayton Kershaw. After all, the Dodgers committed payroll for 2013 is already over $190 million, and that’s without resigning some of the free agents or finding out what some players will earn in arbitration. But everything the Dodgers ownership has said indicates they plan to continue to spend if necessary. In doing so, they won’t be going into poverty. They have a massive TV deal windfall coming. What it means is the Dodgers ownership is willing to live with less profit to be more competitive.

If this sounds familiar, it’s because this is a common strategy in almost every other industry. At Amazon.com, we were willing to live with lower margins on product and shipping in an effort to be the everyday cost leader and to give customers no reason to go elsewhere. Thin the margins and you thin the air your competitors can breathe in, and in that game, the guy with the bigger oxygen tank (Amazon) wins.

That a sports team might employ the same strategy is refreshing, if not as inspiring as the underdog narrative Americans tend to favor. If the Dodgers jack up their ticket prices by a lot, some fans might complain. But if they don’t and just absorb the costs of their new strategy by accepting lower profit margins, Dodgers fans should be thrilled. The emotional return on their loyalty towards the club, all the dollars they’ve spent on tickets, and all the hours they’ve spent watching the team’s games has suddenly increased, and it’s on ownership’s dime. You can still try to be smarter than all the other clubs, but many of the inefficiencies spotted by the A’s are now known and exploited by other teams, so the willingness to spend more money and make less profit than the next guy is still a form of comparative advantage. Consider this the new Moneyball, and kudos to the Dodgers for daring to try it. 

If the Dodgers really wanted to spend this much, is this the wisest way to spend it? That I doubt, but I also doubt they’re close to any real financial constraints. They can likely continue to try to spend their way to further improvement. I was glad when my beloved but beleaguered Cubs brought in Theo Epstein and Jed Hoyer and company to run the team because I think they’re smart baseball guys, but I also want to see Tom Ricketts let them spend as much as they need to get the Cubs a World Series. If they win one in my lifetime, I can honestly say it won’t impact my happiness one bit if they have to spend a fortune (especially Ricketts') to do it.

Contrast this with the Chicago Bulls, another of my teams I’ve followed most of my life since growing up in the Chicago suburbs. Last season, they had the best record in the NBA, but their season ended in the first round of the playoffs after star Derrick Rose blew out his knee at the end of game 1 (I was at that game, and I saw Derrick Rose being carried out just 25 to 30 feet in front of my seat, out a corner tunnel; I blew out my left knee playing basketball in 1997, and as soon as I saw the way they were carrying him out, I knew they were carrying any chance the team had for a championship out the door). One of the strengths of the Bulls last season was their depth, but this offseason, ownership gutted the roster. They claimed that business interests wouldn’t affect their basketball decisions, but everyone knows that they’ve decided largely to punt next season while Rose is rehabbing. They let Omer Asik, C.J. Watson, Kyle Korver, and Ronnie Brewer all leave so they could stay under the luxury tax threshold.

Yes, it would be tough for them to win it all next season without Rose for most of the season, but why should I care if Jerry Reinsdorf and the other owners avoid paying some additional salary and luxury tax this season? It’s not as if they’ll return those payroll savings to fans in the form of reduced ticket prices. No, the astronomical prices will stay, and they’ll simply send out an inferior roster, and United Center will continue to sell out.

Investing our hopes and loyalty in a sports team isn't like investing in stocks. If you own a stock and the company is more financially efficient, your shares tend to be worth more. In contrast, return on invested capital doesn't affect the value of a championship from our favorite sports team. The returns are binary​ in nature: my team wins a championship, I'm overjoyed. They fail to win, I'm disgruntled. 

The cost of higher education

Tyler Cowen posts a chart showing that college tuition is growing faster than the cost of textbooks, medical care, and all items in the consumer price index since 1978.​ He comments that "supply needs to do its job here."

While I agree that the costs of college seem to be on an unsustainable growth curve,  I thought this comment from Michael Ma​kowsky was astute:

Given that prices have been rising steadily for decades, and the relatively paltry concomitant rise in supply, we are left with little choice than to accept that higher education bundle of goods is something terribly difficult to supply. Inputs into production higher education, expertise, suffer from decreasing returns to scale, while the final output has early onset increasing returns to scale from high fixed costs and network effects (credibility and social networks) that heavily favor incumbent firms. But to make matters even worse, the signaling theory of education proponents have a point, and that is the nail in the would-be suppliers coffin. Prestige production is a particularly daunting industry for would-be entrepreneurs – by definition, any product or endeavor with non-trivial expectations for success would cease to carry the prestige they are trying to sell. All of this adds up to a an expected failure rate for would be entrepreneurs that is astonishingly daunting. Even as online schools reduce fixed costs, they still face a likelihood of success that makes starting a NYC restaurant look like trying to sell cigarettes in prison.

My idea for disrupting the higher education market would be for some corporations to step in and offer an alternative. Imagine a school founded by Google, Apple, and, say, Amazon.com, to take one theoretical example. Imagine a mixture of computer science, design, supply chain, and finance courses, supplemented by some other liberal arts offerings that might be taught in cooperation with local universities, maybe Stanford, so that it doesn't feel entirely vocational. In exchange for a partially subsidized education, you agree to spend a few years working at the company post graduation, if they'll have you, like ROTC. You'd still live there at school​ so you'd get some of the soft benefits of college, like socialization and human feedback on your coursework, something these online courses fail to offer.

The signaling benefits that come with a degree taught by folks from some of the leading companies might well be within striking distance of a curriculum from today's leading universities, and it might exceed that of other universities when it comes to direct relevancy in certain industries.​ Think of it as an extended internship, or a farm system in sports. Given the cutthroat competition for personnel in tech these days, it seems like opening another channel for more captive recruiting might be attractive to those companies.

This idea might be far-fetched, but I suspect this scenario would be the most likely to offer both an innovative and ​competitive alternative to the current education system.

Happiness hacks

Happiness hacks are appealing as they're usually simple ways to wring more happiness out of life without having to really lose out in other ways.​ Dan Ariely addresses two common situations in this column in the WSJ:

• Should you pay to park in a garage or spend time driving around looking for a street spot? 
• How should you​ split dinner bills?

In Chinese culture, it's common to fight other diners to pick up the tab for dinner, and Ariely gives some psychological​ grounding for the logic of doing so.

The third approach, my favorite, is to have one person pay for everyone and to alternate the designated payer with each meal. If you go out to eat with a group relatively regularly, it winds up being a much better solution. Why? (A) Getting a free meal is a special feeling. (B) The person paying for everyone does not suffer as much as his or her friends would if they paid individually. And (C) the person buying may even benefit from the joy of giving.

Even before reading this Ariely column, we'd implemented something like this at work, primarily to minimize the psychic pain of transactional hassles like calculating bills, signing credit card bills, making change, etc.. When we were working out of a house in Menlo Park, we'd all go out to lunch together each day. Instead of splitting every bill, one person would always pick up the tab, and Nick, one of our developers, would snap a photo of the receipt and keep a running tally of who owed who. This made meals more pleasant for all of us. An ancillary benefit is that picking up bills accelerates the forming of tighter bonds between the people sharing the meal. Small financial commitments are a simple gateway drug for higher level covenants.

Another simple hack that some restaurants have put into place is pre-paying for meals. HIgh end restaurants like Next Restaurant (and now Grant Achatz's other restaurant Alinea)​ charge you for the meal when you score your reservation, often months in advance of the meal itself. This is beneficial for the restaurant since a single cancellation can kill a high end restaurant's margin for the night. But it's also good for the diner. The most unpleasant part of a fine dining meal is getting a staggering bill dropped on your lap while you're still trying to digest dessert. By pulling that pain up ahead so far, the meal can end more pleasantly. You get up with whatever they've given you as a takeaway gift, and often you can't even remember what you paid for the meal in the first place. The sacrifice for the diner is a bit of free choice on the food and beverages, but most fine dining restaurants have a fixed tasting menu anyhow, and choosing the wine is more taxing than empowering for most diners.

Riding with Uber​ offers a bit of this benefit since they have your credit card on file and you don't have to pay or calculate a tip when you get out of the vehicle. During the journey, there is no visible meter running so you can't stress the ever increasing bill you're due to pay ticking upwards in bright red numbers. The downside is that soon after your ride concludes​, you get an email with the bill which often is your last memory of the ride. For all but the ultra wealthy, it's not the ideal way to end that transaction.

I would not be surprised to see Uber implement some type of discount for a pre-pay account where consumers might deposit $50 or some other amount at the start of the month and just deduct from it as you use the service during the month. Offering riders a discount for choosing this option makes sense. For one thing, pre-paying probably makes you more likely to choose Uber over a taxi since you want to use up your stored balance, especially if unused balances roll forward each month. More habitual usage then provides a greater volume of usage data for Uber to help drivers predict demand and routes ahead of time. Lastly, prepaid funds can provide some short float to Uber.

Companies in cities where Uber operates could be signed up for a corporate perks program in which the company could deposit a monthly stipend into each employee's Uber account​. That would be a great way for Uber to introduce themselves to and acquire lots of new users en masse, in addition to being a great perk in a city like San Francisco, where I can never seem to find a cab when I really need one.

You do not fear death

[Spoiler alerts for The Dark Knight Rises contained within]

I couldn't read Sarah Lacy's The Acqui-hire Scourge: Whatever Happened to Failure in Silicon Valley?​ without thinking of that prison scene from The Dark Knight Rises when, after a few failed attempts by Bruce Wayne at climbing out of that prison, that blind guy explains to Wayne why he keeps failing to make the leap to that final ledge near the top:

Blind guy: You do not fear death.

Bruce Wayne: I do fear death. I fear dying in here while my city burns. 

Blind guy: Then make the climb. 

Bruce Wayne: How? 

Blind guy: As the child did. Without the rope. Then fear will find you again. 

Bruce Wayne: You couldn't have told me that before I jumped and missed a few times and nearly snapped by back in half at the end of that rope?

[Okay, I made that last line up. Also, there was room to get a running start to jump and catch the other ledge, how come everyone seemed content to just try to do a standing jump? Oh, never mind.]​

In The Dark Knight Rises, Bruce Wayne, flush with wealth from Wayne Enterprises, spends hundreds of millions of dollars trying to develop a clean energy source, then goes bankrupt when Bane takes his fingerprints and makes some crazy options trades (a la Mat Honan with GMail, apparently Wayne had not turned on two-factor authentication on his ETrade account).

In real life, Elon Musk, who had plenty of money from PayPal, nearly bankrupted himself launching and financing an electric car company. Most people who obtain a lot of wealth walk away from the blackjack table, but Musk put all of his chips back out in play, and not on sure things. Building cars is inherently a high capital, high risk enterprise, and building electric cars are even more so. But that wasn't enough risk for Musk so he also started a space exploration company. There are entrepreneurs, and then there are Entrepreneurs, and then there are entrepreneurs' Entrepreneurs, and Musk is the latter. If his parents had been gunned down in an alley by a criminal while he was just a child, Mustk might be spending his evenings in a batsuit, fighting crime in the Tenderloin in San Francisco.

My backpack of choice

BBP is having a 50% off sale on their Hamptons Hybrid Messenger Backpack. It's a great deal at half off, or $49.96 rather than it's usual $99.95. If you walk and carry a laptop in your bag regularly​, you can use the coupon code 50HAMPTONS through next Monday night, Labor Day weekend. ​I don't earn any commission if you purchase one of these, I'm just a fan, and this is a great deal.

BBP stands for "bum back pack" and refers to the way the bag rides, low on your back. The double straps distribute weight evenly across both shoulders, like Izzo's dual straps did for golf bags, and the low hanging position of the bag reduces strain on your shoulders and back. I've been carrying a laptop for as long as I can remember, and I've tried a variety of solutions: conventional backpacks, bike messenger bags, and laptop briefcases. Comfort was always a problem. Messenger bags and laptop briefcases put the bag on one side, and eventually that leads to asymmetrical strain on your shoulder, neck, and/or hip. Backpacks often caused me to lean forward to counterbalance the weight.

The Hamptons Hybrid solved my comfort and ergonomic issues and has been my primary laptop bag for over 7 years now. There are only two disadvantages. One is that it looks a bit strange to have your bag hanging so low, but when it comes to my back fashion is a lesser concern, and you can disconnect the double strap in the middle with one click and wear it messenger bag style or grab the fabric handle at the top and carry it like a briefcase. The other minor drawback is that the bag has a lot of padding built in and is heavier in its base configuration than, say, a messenger bag. But I appreciate the extra padding surrounding the laptop compartment. It feels very safe, especially when jamming it under an airplane seat.  With a lighter solution like a messenger bag I'd still purchase a padded sleeve to hold my laptop, bringing the naked walkaround weight up quite a bit.

As laptops grow lighter, or as some people transition to using tablets for travel, perhaps the need for a bag to distribute heavier weights diminishes. I think we're still a ways off from that day, though, and when I travel I still find the sum total of my laptop, chargers, and miscellaneous ​knickknacks to be uncomfortable to carry for long periods. I've had the same large Hamptons Hybrid for years now, and it's a testament to the enduring utility of the design that it hasn't changed one bit, as far as I can tell. Now that I no longer carry a 17" laptop, I'm grabbing the smaller and lighter medium size at this sale price.