Enough with the Basketball Already

I know, I know, I write about basketball too much. Lucky for you the season's almost over.

A friend forwards this article from ESPN Magazine. It's another about measuring performance of basketball players, which, as I've noted, is harder than measuring the performance of baseball players.

But the interesting thing is how the author complains that the "experts" aren't saying anything. That is, they won't say what they're measuring or how. (This came up the Battier article previously, as well.) The reason is that these basketball experts work for basketball teams, and they don't want to give away their competitive edge.

And this makes me think about... finance. I don't know much about finance, but what little I do know comes from having sat through three plus years of finance seminars at the U of Utah. A lot of the seminars have to do with asset pricing; that is, trying to explain and predict how prices of stocks and bonds move.

Asset pricing is tough. The prices don't move in the way our theoretical models predict (there's apparently way too much day-to-day price variation), so we have a hard time explaining the data with economic theory. Further, while there's a lot of variation, there's very little in the way of predictable variation. This fact makes it exceedingly difficult to devise trading strategies that consistently win.

But my overarching thought about the asset pricing literature is this: I wonder how much of what's known is publicly known. I mean suppose you're a finance genius and you figure out a theory that explains and predicts asset prices. You could publish your model in the Journal of Political Economy, and probably win a Nobel Prize in Economics.

Or...

You could start a hedge fund and trade on your idea. And if you did that, then the last thing you'd want to do is tell anyone what your idea is, lest they replicate your trading strategy and reduce your profits.

The "publish" option makes you extremely famous among an extremely small group of people (basically economists and no one else). The "hedge fund" option makes you fabulously wealthy. Hmmm....

So this is why I wonder how much of the asset pricing knowledge is really making it to the academic community at large. I suspect the banks might know a thing or two that us finance profs don't. And the same thing seems to be happening with regard to measuring the performance of basketball players.

I promise --- no more basketball posts for the whole rest of this week.