Organizations and Markets

Risk, Uncertainty, and Baseball

20 February 2007 at 11:58 am Peter G. Klein 2 comments

| Peter Klein |

Frank Knight meets Abner Doubleday in this this item from the Hardball Times.

When we try to predict the outcome of a baseball season, whether as fans or pretend-general managers, there’s a whole lot of stuff we just don’t know. In fact, if you want certainty, we don’t know anything: any player in major league baseball could blow out his arm, crash into a teammate, or just plain lose the skills necessary to hit a slider.

Of course, most of those things won’t happen. When guessing the outcome of a team’s season, it’s a safe bet that somebody will get hurt, some players will underperform expectations, and others will overperform. One mark of a good general manager is identifying the situations in which those are most likely to happen, and then providing the best insurance he can.

Invoking the Knightian distinction between risk and uncertainty, baseball analyst Jeff Sackmann continues:

In a game of Strat-O-Matic, baseball is risky — you could calculate the likelihood of every event before you roll the dice. In real life, baseball is uncertain — no number of dice (or spreadsheet) is going to tell you Chris Snelling’s 2007 OPS. However, when it comes to the game on the field, there’s a continuum between risk and uncertainty, and that’s what I’m interested in. [Links added by PK for the benefit of our non-baseballophilic readers.]

Returning to Steve Postrel’s thoughts on the value added of management, one can perhaps conceive the problem in Knightian terms. In a world of probabilistic risk, “management” is, in principle, a simple problem of contract design. Nor would there be a reason for entrepreneurs to own assets. In a world of Knightian uncertainty, however, there is a role for managerial skill and for entrepreneurial judgment. Indeed, as Sackman notes, baseball “statheads don’t always agree with general managers” on personnel matters.

NB: If you think this is a rather silly example, you haven’t been keeping up with the literature. The academic analysis of sports is a rapidly growing field. Check out the Journal of Sports Economics, for example. Here is a short sportometric piece by yours truly.

Entry filed under: - Klein -, Management Theory, Strategic Management, Theory of the Firm.