August 21, 2014
Information, Humans, and Errors in Valuation
Seemingly out of nowhere, it has become “I was wrong” season for the Baseball Prospectus fantasy team. First, Craig Goldstein wrote about undervaluing Starling Marte, and then J.P. Breen wrote about undervaluing Yovani Gallardo. Both articles do an excellent job analyzing what each author missed regarding the specific player. What I hope to look at today is not what was missed about a specific player, but rather what parts of human behavior cause us to err when forecasting player production.
In order to do so, let us take a look at forecasting and what humans do when forecasting. My favorite definition of forecast (the verb) is from Merriam-Webster and it goes, “to predict after looking at the information available.” I like this definition because it is convenient for my article. I also like it because it highlights that our forecasts are dependent on “the information available.” Relatedly, in Thinking, Fast and Slow, our main human, Daniel Kahneman writes, “An essential design feature of the associative machine is that it represents only activated ideas.” Put differently, we cannot take into account that which we cannot imagine. I am throwing around a lot of combinations of words right now, so please allow me to simplify all this:
When forecasting, we often limit ourselves to using the information available and what we are able to imagine.
Whether we undervalue or overvalue a player, we often do so because we underestimate the chances of an unexpected outcome. The consequence of this is thus overestimating the chances of an expected outcome. Usually this mistake has zero negative consequence because expected outcomes are more likely to occur than unexpected outcomes. However, the more frequently we make this mistake, the greater our chances of being on the wrong side of an unexpected outcome.
Based on what I have observed, underestimating the chances of an unexpected outcome manifests itself primarily in two ways in fantasy baseball: (i) overestimating perceived trends and (ii) overestimating rookie performances. These errors are then compounded when combined with (iii) confirmation bias.
1. Overestimating perceived trends
In J.P.’s article, he (and every other person, including myself) was somewhat blinded by the trend of Gallardo’s diminishing stuff. To our pattern-making minds, Gallardo was an easy valuation heading into 2014 because everything pointed in the same direction. Therefore, we decided to dedicate no additional mental resources to analyzing Gallardo and we missed the very overlookable emergence of his sinker.
2. Overestimating rookie performances
As mentioned earlier, because I failed to place any weight on an unimagined outcome, I consequently overestimated the other outcomes. Even though I was looking at the future probabilistically in thinking that Salazar had a chance to be good—maybe even great—by eliminating the chances of the most negative outcome, I had inflated my forecast for his 2014 production. As a result, I ended up overpaying for him to underperform on two of my three teams.
3. Confirmation bias
The last part I would like to point out is that forecasting player production has less to do with thinking a player will be good or bad and more to do with entertaining all the possible outcomes. What I mean by this is that thinking that Danny Salazar was going to perform well was not an error in forecasting. Thinking that there was no chance that Salazar was going to be below average was a huge error in forecasting. As the always excellent Shane Parrish (Farnam Street Blog) quotes Will Bonner’s Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, “You don't win by predicting the future; you win by getting the odds right.” By searching for disconfirming information, we can better find our blind spots, and thus improve at getting the odds right. This way, we can leave predicting the future to bolder pundits and simply attempt to improve our forecasting in order to improve our chances at winning.
Parrish, Shane. "You Don’t Win by Predicting the Future; You Win by Getting the Odds Right." Farnam Street. 7 Oct. 2012. Web. 21 Aug. 2014.