Market efficiency in sports
Sports markets are not as efficient as financial markets. Nonetheless, the concept of market efficiency does have important implications for sports.
Consider how the NBA has evolved in response to the three point shot. Teams gradually learned that the best strategy was to take lots of three point shots (long shots) and layups (relatively easy 2 point shots.) A recent article in The Ringer describes how defenses have adjusted to this optimal strategy so that “quality shots” are now more difficult:
In a league that has spent the past decade learning the mathematical advantage of a layups-and-3s offensive philosophy, every indication should be that Houston would be shooting more efficiently and thus playing better than Brooklyn. And yet, anyone paying attention to the standings would know that the opposite is the case: The 7-16 Rockets rank 22nd in effective field goal percentage (eFG%), while the 16-7 Nets rank sixth.
For a long time across the NBA, a team’s shot distribution could reasonably predict its offensive success: Take good shots, enjoy good results. Simple. But that relationship, which had declined each season for the past half-decade, is now gone—and may not be coming back. Shot quality doesn’t matter anymore—and both team-building and on-court strategies might have to shift their focus as a result.
I recall when there was a major inefficiency in professional football. I often used to be secretly pleased when the opposing team punted on 4th and 1 at midfield. But why should the decision of the opposing coach make me happy? His job is to make me unhappy. My intuition was telling me that NFL coaching was bad. With the advent of “analytics”, football coaching has improved in recent years, and teams go for it on 4th down more often than in the past. But for each strategy change there is a response:
For teams wanting to retain an analytical edge, it’s on to the next market inefficiency.
Sports are less efficient than financial markets because there is no easy way for most informed observers to profit from market inefficiencies. Only a few people, such as coaches on other teams (say Bill Belichick) could take advantage of bad coaching. Nonetheless, sports efficiency does gradually improve over time. With apologies to Martin Luther King, the arc of sports strategy is long, but it bends toward efficiency.
Of course efficiency in sports can be boring, and hence it makes sense to occasionally change the rules when smart coaches and players figure out boring but effective strategies. What about moving the three point line in basketball back a bit? And would professional tennis be more fun for fans if the net were three inches higher? Would there be a greater variety of shots?