Optimistic to a Fault

Frequent WoW Journal contributor, Steve Walters, wrote a fascinating column on optimism bias for the July 26 edition of the Baltimore Examiner. The column, entitled “Optimistic to a fault” can be accessed by clicking on the link. Or you can just keep reading. The Baltimore Examiner has graciously allowed us to reprint the column below:

If you’re an Orioles fan, you’re probably disappointed, angry, or both. Our beloved Birds are stumbling through their tenth straight losing season and, once again, are out of the pennant race before it’s half over.

So owner Peter Angelos showed manager Sam Perlozzo out one door while ushering former Cubs executive Andy MacPhail in another. The hiring of Mr. MacPhail as chief operating officer puts incumbent execs Mike Flanagan and Jim Duquette on notice they’ll go next if things don’t improve soon.

This is standard procedure in business as well as sports (as if there’s a difference these days). When hopes are dashed thanks to decisions gone wrong, it’s customary to cashier the people who made those decisions.

But let’s move beyond finger-pointing. Instead, let’s ask if there’s anything to learn from the way the Orioles made some regrettable decisions; let’s see if there’s a lesson in this season’s meltdown that might be useful even beyond the baseball diamond.

I submit one exists. Specifically, many of this team’s flaws result from a very common but powerful bias afflicting those who picked the talent and decided how it would be used.

This bias has nothing to do with racism, ageism, or the usual forms of prejudice. The technical term for it, among psychologists and economists, is “optimism bias,” and it refers to our tendency to make certain hard decisions as if wearing rose-colored glasses.

More precisely, optimism bias leads us to give greater weight to positive bits of information when we make decisions, and to under-estimate the importance of negative bits. In effect, the world is full of ups and downs, and it’s natural to emphasize the ups and soft-pedal the downs. In high finance, in baseball, and in life, however, you’ve got to resist that urge.

If you’re picking stocks, for example, you obviously shouldn’t look just at a company’s profitable years in projecting its future, but at the entire record. And in personnel decisions, you’ve got to consider a person’s bad days as well as good ones.

Take the Orioles bullpen (please!). Last year it was a disaster, so over the winter the O’s spent $41.5 million to acquire three established relief pitchers-Danys Baez, Jamie Walker, and Chad Bradford-to solve that problem.

Except that “established reliever’ is an oxymoron. Most relief pitchers’ careers resemble roller-coaster rides. Their stats are dependably erratic, commonly fluctuating widely from year to year. Mr. Baez, for example, recorded 41 saves and a 2.86 ERA (for earned run average, or earned runs allowed per nine innings pitched) in 2005, but collapsed to nine saves and a 4.53 ERA the following season. The Orioles’ were seduced by Mr. Baez’s best years, hoped that they represented his real skill level, and made a $19 million mistake. He posted no wins, four losses, and a stratospheric ERA of 6.52 before heading to the disabled list this season.

What’s worse, the O’s accumulated quite a few players like Mr. Baez-useful during their ups, season-wreckers during their frequent downs.

But this is a very common human error. Economist John Burger and I have researched the baseball labor market, and (in a paper that will soon appear in the Southern Economics Journal) found that teams, on average, under-value consistency and over-value players who produce eye-catching but rare “big years,” resulting in considerable red ink.

But don’t we all know people who regularly fall prey to optimism bias in making financial decisions or forming relationships? A friend who lost a bundle in the tech stock bubble (or, more recently, the real estate bubble)? A relative who married someone who was the life of the party on good days but a major pain on bad ones?

All of which is cold comfort to long-suffering O’s fans. We don’t want the people who run such an important enterprise to have the same biases we do. We need them to be smarter than that.

Steve Walters teaches sports economics at Loyola College in Maryland and has served as a consultant to two big-league teams.

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