A Different Spin: How Statistics Is Changing Conventional Thinking (Basketball Analogy)

With March Madness upon us, we can’t help but highlight a fascinating evolution in the sport of basketball over the past ten years. Like “Moneyball” in baseball, it derives from statistics. It’s not rocket science, but following its insights requires discipline and willingness to run against the grain. This kind of independent thinking matters to so many decisions in life--whether in business, sports, or investing.

Conventional wisdom says that the mid-range jump shot—a shot taken, say, 15 feet from the rim—is a standard, acceptable shot in basketball. Remember the iconic, last-second game winner by Michael Jordan in game seven of the 1997/98 NBA Championships? That one.

Data analysis shows that shots from the mid-range are among the poorest options. The success rate (making the basket) is among the lowest on the court. Around a third of shots taken are made. And the reward (2 points) is relatively low.

Data shows that it’s much better either to take a layup for those 2 points (much higher success rate) or to attempt a 3-pointer from about 24 feet in the NBA (closer to 20 feet in college and high school). Ironically, when the 3-point line was introduced to the NBA in the 1979-80 season, it was generally considered a gimmick.

The implication? Avoid the traditional mid-range jump shots. Work the play for an inside shot (preferably a layup) or a 3-pointer1.

The lesson has changed how offenses and defenses strategize. It has changed scouting and recruiting. It explains why more 3-pointers are taken, and why teams have minimized mid-range jumpers.

If you are watching the NCAA basketball tournament over the next two weeks, observe how this insight is or is not being followed by the teams. See if conventional wisdom is winning, or if the newer, more modern game has taken hold.

CLOSING COMMENT

As investors, why do we care about basketball statistics? We believe that a pure quantitative measurement of the facts will help practioners in any endeavor be more consistent and disciplined with their decisions. It helps them think independently, challenging conventional wisdom with merit.

In investing, conventional thinking and “gut instinct” are generally destructive to success. This is why we invest so much time and resources in our investment research system—financial databases, programming, and algorithms. Decisions based on facts and probabilities help us focus on what we believe to be the most important drivers for future success.

FOR FURTHER INFO

The following link provides a great, easy to follow analysis (from 2014) of shooting data in the NBA. http://grantland.com/the-triangle/only-3-pointers-and-layups-the-rio-grande-valley-vipers-on-the-grantland-channel/.

Here is a link to an article we wrote about how we believe the “Moneyball” concept exists in our own research approach: http://www.cornercap.com/in-depth-reports/%E2%80%9Cmoneyball%E2%80%9D-making-money

1FOOTNOTE: There are, of course, nuances. You need players who are strong enough and talented enough to make 3-pointers, for example. It also helps to have two or three adept shooters to spread the defense out. And, technically, the NBA redefined something called the illegal-defense rule in 2001 (ending the required “man-to-man” defensive coverage, allowing “zone” defense), which helped encourage broader offensive plays. Without that rule, a superstar could simply and continuously exploit weak defensive match-ups.