Book review: Playing the odds in big business

Business is obsessed with collecting data, and awful at understanding it.

“Vegas exists because people suck at math,” says one member of the Massachusetts Institute of Technology’s infamous blackjack team. From the early 1980s through the mid-’90s, MIT’s card counters were the scourge of casinos across the United States. Most of the games on a casino floor have an element of randomness, like roulette, or an unreliable human element, like poker. But blackjack is fuelled by “conditional probability,” meaning that cards played in the past have an effect on what cards will be played in the future. The game has a memory. And that means it can be beaten.

Card counting combines a mastery of the basic strategy of blackjack with an ability to keep track of what cards from a deck have been played, and the knowledge of what is statistically the best play in any scenario. Jeffrey Ma was a key player toward the end of the team’s run, and is the basis for the lead characters in both Ben Mezrich’s book Bringing Down the House and the 2008 film adaptation, 21. He and his teammates won millions from gaming houses across the United States by simply abiding by the numbers. “Casinos make their fortune off exploiting incomplete or faulty reasoning,” he writes. “We made our fortune throwing that right back in their face.”

The House Advantage: Playing the Odds to Win Big in Business (Palgrave Macmillan) offers some of Ma’s war stories from the casino pits and advice on applying the lessons he learned there to the world of business. After graduating from MIT, Ma took a job as an options trader in Chicago. But he quickly soured on it, discovering that the rules of finance failed to offer the same certainty that gambling did. “Blackjack had me believing in an extremely high standard of analytics,” he writes. Since walking off the trading floor, Ma has brought that standard to bear as an entrepreneur and consultant in the increasingly data-reliant business of professional sports.

The fundamental takeaway from card-counting, he writes, is that “data matters, and your organization should proceed with that mantra at its core. Look to incorporate data into all of your decisions. Challenge yourselves to use data in every scenario imaginable. By creating a culture where data is embraced you will find answers for questions you never thought to ask.” This isn’t itself a revolutionary notion; but Ma’s bigger point is that in business and beyond, we retain a profound ambivalence about statistics and analytics.

As much as we want to believe in the idea of data and analysis, we’re skeptical when the numbers are actually put in front of us. Ma cites a report by Accenture that found two-thirds of large U.S. companies believe they need to improve their analytical capabilities and use more statistics; but of those companies, 61% think the data they’re collecting are deficient. We want to quantify the world around us, but we’re mistrustful of what we find when we try. As one pro-sports number cruncher tells Ma, “No one would tell you that they don’t want more information with which to make decisions, but in the same breath they might tell you that they don’t need to hear any more statistics.”

This skepticism, Ma thinks, is less the fault of the numbers than of the fact that we abuse the data we collect, in an assortment of ways. Foremost among them is confirmation bias, our tendency to ignore data that doesn’t support our assumptions or whatever point we’re trying to make. Most of us have heard the term, and most smart businesses have added checks and balances to their processes to try to overcome confirmation bias — for example, by making sure that their business is structured to allow the open flow of information between executives and those close to whatever problem is being addressed, or by including designated naysayers in the conversation around a decision. But as Ma illustrates with examples from the gambling and business worlds, it’s a tricky problem to eliminate completely, and one that can compromise even the most carefully accumulated data. Selection bias, wherein we draw incorrect conclusions based on looking at only a portion of a data set, is just as common.

And just as we frequently mistake correlation for causation, we’re susceptible to what’s called the “gambler’s fallacy,” the belief that anomalies from expected outcomes in a random process are likely to be evened out by their opposites in the future — or, more simply, the idea that a roulette ball that’s landed eight straight times on black is therefore more likely on the ninth spin to land on red.

Despite all of these tendencies to error, our desire to have statistics to quantify the world around us only seems to be increasing. “From horse racing to real estate,” Ma writes, “analysts these days try to fashion ???single numbers’ to answer difficult questions or to simplify what would otherwise be a highly complicated scenario.” And while these efforts are deeply challenging and often offer imperfect results, there is some sense that we’re learning how better to do it. But crunching the numbers is only half the battle. “Being able to analyze situations with statistics is extremely important and hard, but convincing other people that it will work is just as hard and probably even more important.” The notion of leading by intuition, as romanticized by Jack Welch and his disciples, still holds sway over many in the business world. The struggle for the quants, Ma suggests, is to lose the smugness and arrogance that too often accompany their analysis and to help find ways for those with and without advanced math degrees to better communicate.

The business world will never be completely objective, like blackjack. When the cards were dealt, all Ma had to do was bet more when the count was in his favour, and less or nothing when it favoured the house. But finding a way to bridge the objective and subjective more effectively can only help. As Ma puts it, “Striving to make your world more like blackjack than poker will help you make the right decision more often.”

Executive summaries

More Money Than God : Hedge Funds and the Making of a New Elite (Penguin)
Sebastian Mallaby

“They were the new American elite — the latest act in the carnival of creativity and greed that powers the nation forward.” For 70 years, hedge funds have operated on the margins of the layman’s understanding of the markets. Unregulated, and closed to investment from all but the very rich and very well connected, they’re famous for their robust returns, but more infamous for their spectacular busts, their managers’ extravagant new-gilded-age lifestyles, and their influence, real and imagined, on the workings of the financial system. Mallaby, a Washington Post columnist and a senior fellow for international economics at the Council on Foreign Relations, begins in 1900 with the birth of hedge fund inventor Alfred Winslow Jones, and presses forward through a narrative history of this most inscrutable of financial vehicles, and the men (and they are overwhelmingly men) who have driven them. Despite Mallaby’s critical recounting of the shady dealings in which hedge funds have often partaken, and the damage they’ve done their investors and the markets, there’s an argument here for their continued unfettered operation. But it’s less compelling than the anecdotal stuff, snapshots of genius quants and volcanic alphas playing dice with billions of other people’s dollars.

Green Gone Wrong : How Our Economy Is Undermining the Environmental Revolution (Scribner)
Heather Rogers

“Shopping green is alluring in part because it is simple (albeit often expensive), unlike the messy business of working toward systemic change.” But Rogers, a senior fellow at lefty U.S. think-tank Demos and contributor to The New York Times Magazine and The Nation, spends most of her page count debunking the notion consumer-end market decisions are going to save the polar bears, or the planet. She does reckon we’ve achieved a watershed in popular environmental consciousness, between Hurricane Katrina, An Inconvenient Truth and the Stern Review, and Bush 43’s state of the union acknowledgement of climate change in 2007. But if consumer desire for eco-friendly choices is growing, Rogers argues that many of the options we’re given to lessen the environmental impact of our lifestyles are little more than exercises in greenwashing. Carbon offsets are clumsily implemented — often further harming the environment — and do nothing to curb pollution in the immediate term. Crop-based ethanol doubles down on existing problems. Fair trade and organic farming offer their practitioners little economic reward. Travelling the globe, Rogers sees little indication that we’ve developed the stomach for the tough, systemic reforms that environmentalists believe offer our only ecological salvation.

Mad Men and Philosophy: Nothing Is as It Seems (Wiley)
Rod Carveth and James B. South, eds.

The stock in trade of this award-winning 1960s ad industry TV drama is moral ambiguity, perhaps as much of a hook as the smoking and drinking and skirt-chasing that titillate the show’s audience. Profs. Carveth and South are among those who have been sucked in by Matthew Weiner’s creation. “Somehow we found ourselves rooting for Don Draper to sell cigarettes, get away with dalliances, and conceal his true identity.” The essays collected in the latest of the pop culture and philosophy series offer insights about how Nietzsche’s exploration of the positive power of active forgetting can illuminate the Draper, Pete Campbell and Peggy Olson characters; a comparison between the social structure of Sterling Cooper and an Aristotelian definition of friendship; and a glimpse into the Existential Void of Roger Sterling. Sterling — whose readiness with a quip has been one of the show’s saving graces for viewers unmoved by Draper’s internal turmoil — is examined as a possible embodiment of Kierkegaard’s aesthetic man, and of Nietzsche’s last man. In an early episode, a heart attack forces Sterling into a moment of what for him passes as reflection. “Jesus! I’ve been living the last 20 years like I’m on shore leave,” he exclaims. “What the hell is that about?” Herein lie a few suggestions.