Book: Sports Gene
Author: David Epstein
Every sports fan should read this book. I don’t follow sports (to stop from feeding my addictive personality 24/7 excitable news) but I read really good reviews of the book, and picked it up. I learned a whole bunch of stuff from it, but here I will list only things that offer some lessons in investing.
Chunking Theory: There’s a story about a softball pitcher, Jennie Finch, who bewildered the top baseball players who’re used to facing balls in 90+ mph with 68-mph softballs. None of the All-Stars baseball players including Albert Pujos and Barry Bonds could face her. Epstein tells us that almost all of us have a simple reaction-time of 200ms (1/5th of a second), so it’s not that the great players can react faster, but it is because they can “see” more information in the pitch that a normal person can’t. It takes about 400ms for a ball to reach from the one end of the pitch to the other and the window in which the bat needs to hit the ball is 5ms–impossible window for a human eye to discern anything. The reasons great players are able to hit the ball is because they can reasonably predict the arc of the ball based on the cues that pitcher gives from the way ball is thrown, the way it’s spinning and so on. This is called the “chunking theory” where a lot of information is carried in small nuances of the exhibit, but experienced and/or great players don’t process all these pieces individually, but in a small number of meaningful chunks based on patterns they have seen before. When faced with 68-mph under-hand softballs, the players are stripped of that “crystal ball” which would help them predict the arc of the ball, and they’re not used to facing softballs, and thus, are clueless.
What does all of this has to do with investing? One, this tells us that investing is an old man’s sport–the more you know, the better you get. Period. The problem arises when you’re faced with a situation that has a pattern, which you’ve never seen before. For that, the only way to perform well is to know an immense amount of financial history, which will help identify “chunks” with patterns that resonate.
Apparent differences can turn out to be only cosmetic: Epstein shares findings from Kenneth Kidd’s data which shows that some African populations have genetic variation in their DNA than entire populations from East Asia or Europe. In one particular stretch of DNA, more variation was found among African Pygmies than the rest of the world combined. Epstein says that it is plausible that an African may be more different from his neighbor than Jeremy Lin’s genome is different from Lionel Messi’s. This throws the whole concept of race as identified by skin color in disarray.
More weightier conclusions and thoughts aside, this tells us how surface understanding of something can lead us down to an incorrect path. I am reminded of the example of Crown Cork & Seals that Richard Rumelt talked about in the book Good Strategy Bad Strategy. As Rumelt described in the book, on the first glance it appeared that CC&S was losing out on big orders and thus had a disadvantage, on closer inspection it was apparent that CC&S’s focus was on short runs where it could control the pricing and avoided being a captive supplier.