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Welcome, everybody, to our podcast All Else Equal.
My name is Jules van Binsbergen, and I'm the Nippon Life Professor in
Finance at the Wharton School of the University of Pennsylvania.
>> And I'm Jonathan Berk, the A P Gianni Professor of Finance at
the Graduate School of Business at Stanford University.
So Jules, why do we call this All Else Equal?
>> Well, because when people make decisions,
they often have a need to simplify the problem.
And one way to simplify the problem is to just only change one thing at a time
assuming that all the rest stays the same.
But the problem by making such a decision that way is that when you ignore those
other things adjusting, you often end up making the wrong decision.
>> When you make a decision, the world around you reacts.
It's not just the world is changing constantly,
it's the world changes because of the decision you make.
>> And so over the next few episodes, we're going to explore a number of
important business decision making situations.
Where we're going to find that ignoring the reaction of the world around you is
going to lead you down the wrong path.
>> Jules, I think the best way to communicate what this mistake is all about
is in the context of a very specific example.
And the example I have in mind is putting together the best basketball team of
all time.
>> So how would we go about that?
Because these days, there's so many statistics and so
many different things that you can look at in trying to make the decision.
What do you think is a good statistic to start off with?
>> Well, I agree, I think statistics is the place to start.
I mean, after all, analytics is the way of the future.
So why don't we start what does seems to me the most obvious statistic,
which is field goal percentage?
So for listeners not that familiar with basketball,
field goal percentage measures a player's ability to put the ball in the basket.
That is the number of successful baskets divided by the number of tries.
A good player is going to make most of the baskets he tries, and so
would high a field goal percentage.
>> So if we could find a number of players that have a super high field goal
percentage, one would think that if you would put those together in a team,
that you really get a very good team.
>> Well, if we use that criteria, the team will consist of DeAndre Jordan,
Rudy Gobert, Clint Capela, Montrezl Harrell, and Artis Gilmore.
>> I'm not sure that was the team that I had in mind Jonathan,
where's Michael Jordan?
Where's Kobe Bryant?
Where's Julius Erving or Larry Bird?
Where are all those players?
>> Yeah, this is a good team but it ain't consisted of people we were thinking of,
so something's going wrong here.
If you look at that statistics and you look where Michael Jordan is on
the list of all time field goal percentage, he's 156.
>> So what's going on here?
So what are we missing?
>> Well, this is a good example of All Else Equal thinking.
Let's think about this.
Holding all else equal, you'd rather have a player with a higher field goal
percentage than a level field goal percentage, but the problem is,
you can't hold all else equal.
In this case, the defense adjusts.
So let's take Michael Jordan for example.
Through most of the Jordans career, he was double covered,
which made it a lot more difficult for Jordan to sink baskets.
And therefore, that lowered his field goal percentage.
>> That's right.
And because Jordan was double covered,
that also meant that somebody else like Scottie Pippen was not covered at all.
Meaning that it was easier for him to sing baskets,
increasing his field goal percentage.
If you think about it, it's actually quite impressive that Jordan was ranked 156th
despite the fact that he was often double covered.
So clearly, the competition responding is one example of all else equal thinking,
but that there is another one.
And the other one is, can I just take all these players,
take them out of their usual context, put them together and
suddenly think that that team will function as a team?
In other words, team players have synergies together,
can I just pick five stars and expect these synergies to carry over?
>> No, I don't think you can.
So there is that as well, although I would say, the more important point is,
that when you make a decision, your competition will respond.
So any business decision you make,
you cannot think of making that decision in isolation.
Because your competitors in seeing your decision are going to
adopt different behavior and you can't ignore that response.
>> Yeah, and it's not just your competitors, right?
I mean, for example, if you change the price of your good as a business,
you should expect your customers to respond.
And there's also relationships with suppliers.
All of these different players that you're interacting with in a competitive
environment are all going to be responding to the decisions that you make.
>> I know, and in some cases, it's obvious.
I mean everybody understands if you raise your price,
your customers are going to go to your competitors.
Or if you lower the price, maybe your competitors will lower their price too and
so you won't get any more customers.
That's a pretty obvious situation, but what we're going to do in this podcast
series is talk about situations which are not so obvious.
For example, field goal percentage, to a naive basketball fan,
that would seem like a really good criteria for picking a basketball team.
>> But if we think about it a little deeper, then we can come up with a better
measure of how to measure the skill of a basketball player.
So what would that measure be?
It is the number of team baskets scored when the player is on the court,
regardless of who scores that basket.
>> And that measure obviously takes into account the defense adjusting
to any one player.
Of course, the manager will adjust the players he plays in response
to who the offense is putting on the field, so that's not a perfect measure.
In any event, this is what people called unintended consequences.
And obviously,
it's sometimes very difficult to predict how your decisions will affect the world.
But with that said, I would argue that many times, what we would call
unintended consequences are really not thinking through the problem and
understanding how your decisions affect other people's behavior
>> Yes, unintended by who is the question?
Because clearly, if you thought through the decision making problem from the your
competitors perspective, there is indeed absolutely nothing unintended about it.
It's fully intended how they're responding to what you're doing.
>> So this is a good time to introduce our guest,
someone who has actually made decisions about putting basketball teams together.
>> Indeed, because our guest today is Billy King,
any basketball fan will know Billy.
He was a general manager of the Brooklyn Nets and the 76ers,
where he was also team president.
He started his high school basketball career in Northern Virginia.
And then went to Duke to play for Coach K, who became a major mentor for him.
After briefly playing in the NBA, he started a coaching career.
He coached at Illinois State and started working with Larry Brown.
And became assistant coach at the age of 27.
He worked his way up quickly and
he became a general manager at the 76ers at the age of 32.
Billy, thank you for being with us today.
>> You're welcome.
It's exciting,
you don't always get to Zoom with two distinguished people as you guys.
>> [LAUGH] >> To Zoom with a distinguished NBA
general managers, so we're all in the same boat.
>> [LAUGH] >> Indeed, so Billy,
what we'd like to have your input on today for today's episode is,
how do you put a successful basketball team together?
And the reason why we're focusing on this is that putting successful teams of people
together is one of the most important business decisions that managers need
to make.
And so we'd like to hear from you.
In the basketball context,
what are the key tradeoffs that you face when you put such a team together?
>> I'm a believer that you've got to take everything into account.
You've got to take the eye test, you got to take the analytics.
I was a big believer in psychological testing as well.
And I just always say in draft forms, I said yeah because guys will start arguing
their point and they'll come up with different things.
I say, let's not focus on what a guy can't do, let's focus more on what a guy can do.
Because if we're going to focus on what a guy can't do, we can always come
up with numbers, or eye test, or tape to prove that this guy can't play.
Because I think so much of putting teams together comes down to personalities,
especially on the court.
You can have the five best players in NBA, if they don't get along,
it's not going to work.
Because personality, and I will use Coach K, for example, playing with the Duke.
And he always had a metaphor that he said,
it's like having five fingers on your hand.
If you go to punch a wall like that, you're going to break your fingers.
But if you make a fist, you're going to have a better impact.
And that's how he always talked about it, that we, in order to win,
we gotta be together.
And I think that to me is all the data, all the analytics,
all the stats that go into it, whether it's in business, sports, whatever.
You've gotta get people to realize that the big in here is better than them.
I think so many times, you can have the individual goal, individual belief in
yourself, but you've got to put it within the team for it to work.
And you guys have seen it in classrooms,
you probably have maybe one student is trying to impress you and
they're answering every question and the rest of the class gets annoyed with him.
And then eventually,
when you go to a set of projects, nobody wants that person in their group,
because they're like, this guy's not going to work well with the team.
And the best groups that you probably have on projects are the ones that spend time
together, work together, and they all bring something to the table.
So that to me is what I'll always looking at trying to build teams is who
is willing to sacrifice for the good of the team.
And I would tell guys on teams like that object is to win.
And if we win, everybody's going to make money, everybody's going to have success.
>> So that's a great point, Billy.
So one thing that we discussed before already is this
idea of what are the synergies that the team is going to bring to the table.
And the way that you described this was, if you make a fist,
you can punch through the wall, but the individual fingers cannot.
And one thing, of course, is that if you put a team together and
you take the players from all over the place, like we did in our exercise.
How do we know whether those fingers make a good fist together?
Maybe it's not a particularly strong fist that we're getting.
The only way to figure out how strong the fist is,
is to actually have the players play together.
And another thing that I think you brought up that was great was that,
the way to get a sense of how valuable those synergies are is through
the psychology of the players.
Because if the players don't work well together,
then of course in the end, the fist is not going to punch very well.
And so I think that was great.
>> And to add to what you both are saying,
you could think of the synergies as an all else equal mistake, right?
Because if you act selfishly holding all else equal,
selfish behavior will get you ahead.
But you can't hold all else equal.
If you're a selfish, other people are going to react to you differently.
And therefore, in the long term, it is not in your interest to act selfishly,
it is more in your interest to act cooperatively and increase the synergy.
And so, people that understand that reaction are better team players and
work better on teams.
>> And so from a managerial perspective, I think one way to get at this effect is
also how do you set the incentives in the team?
How do you make sure that the players are properly incentivized to act in
the interest of the team.
Billy, do you have any thoughts on that?
>> Well, the problem when you get into professional sports,
there's two things that sometimes work against each other.
One is the business of selling tickets.
And so when you're in the business of selling tickets, sometimes,
the business side you want that star that's going to to sell tickets.
And so if you get one that sell tickets, you get two, you sell more tickets, three,
and so on.
So sometimes, getting those stars is great for the business side.
It may not be as good for the basketball side.
And so like the Giants, nobody had them doing what they're doing.
And that's the beauty of, say the New England Patriots.
And I think the reason they will had such success during the Belichick and Brady
era is that Brady had the understanding that he needed the team in order to win.
As good as he was, he needed that team.
So he was willing to sacrifice some of his money, restructures contracts so
they can get guys in.
And he was willing to tolerate some of the things that he may not have liked from
Belichick so they can win.
And Belichick, same thing with Brady.
But they realized at the end of the day, he was knowing that he was more important,
and I think it was all led by Brady.
And everybody knew if he can be treated a certain way,
they all had to be treated the same way.
So that to me is a guy that said, okay, the team is bigger and
more important to me.
And he was the leader of the team and that's why they won.
>> Yeah, it's very interesting to getting many times teachers, students,
aligning incentives is really what matters to get the objectives that you like.
And as you discussed, I mean,
it's not even clear that always all the incentives are aligned.
If you want to achieve ticket sales and maybe something different than winning
games, that's a very interesting aspect of this.
>> Yeah, and the other one thing I also try do with player's contracts after they
[INAUDIBLE] in bonus structure, always try to do bonus structures.
They were more team-oriented than individual-oriented.
Because I think if you did, a lot of individuals, then guys but
that's all they will striving for, they wanted that bonus.
>> You raise so many interesting points.
One of the most important things I try to impart to students is,
I call it leadership is everything.
Without a leader, there is no hope of doing anything.
And with an effective leader, you can achieve an amazing amount with
mediocre people because leaders know how to motivate and
they know how to get teams to work together.
And I think that skill is so rare, and it's why it gets paid so much, right?
People criticize CEO pay, my feeling is I think CEO's underpaid not overpaid, right?
It's so rare to have that ability to turn a team and
organization into an effective unit all working on the same thing.
If you can do that, the value you create is just enormous.
>> Now you're exactly right, and
I think back to Coach K is someone I think he'd be successful no matter what business
he was going to go in because he's a great leader.
And that's really what a head coach is in the pro ranks or whatever.
It's just somebody that lead.
They don't have to be the best x and o, but they gotta be able to lead people.
And because you can be a leader, if nobody's going to follow you,
then you're not a leader.
>> What insights did you gain in the professional realm that you use
outside of basketball?
>> I think the biggest thing is to treat people how you'd want to be treated.
No matter how good a player they were or how bad, I tried to treat them all,
and probably goes back to always Coach K's, I tried to treat them all fairly and
not equally.
Because I think you can't treat everybody equally,
you got to treat them fairly because everybody does things differently.
If somebody is late all the time,
I can't treat them the exact same as somebody who's on time all the time.
So I remember when he said that and this stuck with me Coach K's that
you got to treat them fairly but you can't treat them all equally.
>> That's very good advice.
>> Thank you so much.
>> Thank you so much for doing this >> You're welcome, thank you.
>> So we now have a pretty good idea of the damage that all else
equal thinking can do.
And we've introduced the concept in the context of a simple, relatable example,
which was how to put together a basketball team.
But of course, given the fact that the podcast is about business decision making,
over the next few episodes,
we're going to focus much more on real life business decision making context.
And one of the next ones that is going to be an important one is going to be how do
you put together an optimal stock market portfolio?
And as you will see, when people often put these portfolios together,
they also make all else equal mistakes.
>> Our guest will be Cliff Asness, Founder and
Managing Principal of AQR Capital Management.
Cliff is widely recognized as one of the most successful money
managers alive today.
To be a successful money manager,
it's important to avoid a particular all else equal mistake.
And so it'll be interesting to get Cliffs perspective on that mistake.
>> Thanks for listening to the All Else Equal podcast.
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For more information and episodes, visit allelseequalpodcast.com or
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The All Else Equal podcast is a joint
venture of Stanford University's Graduate School of Business and the Wharton School
at the University of Pennsylvania, and is produced by Podium Podcast Co.
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