Invest Like the Best with Patrick O'Shaughnessy - Daryl Morey - Systems Thinking in Sports - [Invest Like the Best, REPLAY]

Episode Date: January 16, 2024

This week, we are running a replay of my conversation with Daryl Morey from last year. Daryl is the President of basketball operations for the Philadelphia 76ers. Together with my friend and past guest of the show, Sam Hinkie, Daryl pioneered the analytics movement in basketball. He’s been so influential his style has its own name, “Moreyball”, a nod to Michael Lewis’s book about baseball, Moneyball. I had a blast talking to him about negotiation tactics, systems thinking, hiring, and a ton more. Please enjoy this great conversation with Daryl Morey. For the full show notes, transcript, and links to mentioned content, check out the episode page here. Listen to Founders Podcast. ----- This episode is brought to you by Tegus, the modern research platform for leading investors. The gold standard for research, the Tegus platform delivers unmatched access to timely, qualitative insights through the largest and most differentiated expert call transcript database. With over 60,000 transcripts spanning 22,000 public and private companies, investors can accelerate their fundamental research process by discovering highly-differentiated and reliable insights that can’t be found anywhere else in the market. As a listener, drive your next investment thesis forward with Tegus for free at tegus.co/patrick. ----- Invest Like the Best is a property of Colossus, LLC. For more episodes of Invest Like the Best, visit joincolossus.com/episodes.  Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here. Follow us on Twitter: @patrick_oshag | @JoinColossus Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com). Show Notes (00:00:00) Welcome to Invest Like the Best (00:03:15) The basic principles of sports and what makes for a great sport (00:09:54) How resource concentration influences outcomes in various sports (00:13:13) The degree of certainty in predicting sports outcomes based on existing data (00:16:32) Using the concept of KPIs to optimize for certain characteristics to win games (00:18:45) Training teams on specific systems and plays versus leveraging individual talent (00:21:07) Why superstar athletes are key to success in basketball (00:24:02) Dealing with constant expected value calculations to appease stakeholders (00:25:30) Building the organization’s back office to find talented athletes (00:28:32) How he and other GMs make organization-level decisions (00:34:12) Why he’s involved with basketball as opposed to other sports (00:36:17) How he uses his frameworks to figure out systems outside of mainstream sports (00:37:41) Problems with the rules and economic factors of professional soccer (00:41:53) Suggestions to mitigate huge point spreads that make viewers disinterested (00:42:54) Trends he’s observed in the worlds of music, movies, and books (00:45:33) His perspective on developing one’s own career path (00:48:22) How challenges in his youth benefited him in the long run (00:49:28) The person he would call for advice if he was stuck in a foreign prison (00:51:01) His emphasis on first principles and why he supports free speech (00:52:31) Takeaways from a Harvard negotiation class he took (00:57:07) The power of refining the terms and definitions of a deal post-negotiation (00:58:51) The four people in the world that intrigue him most (01:01:40) The kindest thing anyone has ever done for him 

Hello and welcome, everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money. Invest like the best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at join colossus.com. Patrick O'Shaughnessy is the CEO and founding partner of Positive Sum, and the CEO of of O'Shaughnessy asset management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of positive sum or O'Shaunacy asset management.

This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of positive sum or O'Shaunacy asset management may maintain positions in the securities discussed in this podcast. My guest this week is Daryl Morey, who is president of basketball operations for the Philadelphia 76ers. Daryl is a computer science graduate, but has become one of the NBA's most successful general managers during his time with the Houston Rockets and the 76ers. Together with my friend and past guest of the show, Sam Hinky, Daryl pioneered the analytics

movement in basketball. He's been so influential that his style has earned its own name, Mori Ball, a nod to Michael Lewis's book about baseball, money ball. Daryl is also the co-founder of the MIT Sloan Sports Analytics Conference, which has become the gold standard forum for in sports analytics. I had a blast talking to him about negotiation tactics, systems thinking, hiring, and a ton more. Before we transition to the episode, I want to highlight the Founders podcast, which is part of our Colossus network. David Senra, who hosts founders, has devoted his life to learning from history's greatest entrepreneurs, and every week he distills the lessons of a different founder. If you want an entry point, I highly recommend starting with episode

136 on Estee Lauder. I hosted David on Invest Like the Best, The Best, this summer and it's hard not to walk away insanely energized after listening to any episode with him. You can find a link to founders and that episode in the show notes of this conversation. And you can search all past transcripts on our website, join colossus.com. Please enjoy this great conversation with Daryl. So Daryl, in preparation for our conversation, I had so much fun both talking to mutual friends, but also just rethinking about sports again for the first time in a long time. and you're probably the perfect person to ask the series of questions that I'm prepared to go into.

But I wanted to start with principles about games in general and the makings or the features, in your opinion, of a perfect sport or a perfect game. And I start here because I've heard you say basketball is sort of a nearly perfect game, that it's always evolving, there's room for creativity and so on. And then I've visited Michael Mobison's skill versus luck spectrum. And you find basketball is pretty high in the skill spectrum, much higher than, say, football. or soccer, but those have much bigger audiences. There's just so many variables to what go into making a great game or a great sport.

And almost at like a philosophical level, I'd love you to start there by just describing what you think those key features are that make for like a forever game. I love that question because it's become pretty core as all these games are being created, new e-sports and things like that. And I have to say, thanks for having me on. Patrick, long-time, longtime listener. I'm very nervous just because a lot of people, I admire, I've been on, but I mostly worry about providing value to listeners because I feel

like you guys, speaking of skill, you have the highest value ratio of most podcasts. So obviously, there's the skill luck continuum and all of a sudden, who's someone I've admired for a long time, has written about this and talked about this. And we even had some conversations about it recently at a Santa Fe event. And I tend to like more skill sports, but I think from a macro perspective, a healthy amount of luck helps viewers. So people tune in or go to an event for two reasons. They want to know how important is this game to some prize that you're chasing, whether it be championship or in Europe, they have different models with different kinds of championships is why the NBA is looking at adding different kinds of tournaments within the season.

And then how unlikely is the outcome? If you know if you go, who's going to win and you know exactly what's going to happen, that's not a very compelling tune in. You come for the any given Sunday or truly two highly skilled teams that are 50-50, 60-40 outcomes. And I do think basketball often falls down on some of those requirements. You get some games on a Monday night with a very good team, a Golden State at their peak with Philly during Sam Hinkies reign. And you sort of know the outcome. When I've talked about basketball as I think almost the perfect sport, it's really more of a selfish answer for me. I tend to like skill. And I tend to like games where the data hasn't solved it completely, but the data also informed. So my career is on using data to help

decisions across different fields and basketball most recently. And basketball will never be solved. If you think about what goes into one, even one jump shot in basketball, is it because that player worked on his shot for 10,000 hours prior to this? Is it because the defense was bad? Is it because the pass was good. Literally one jump shot has so many variables. You can isolate them and try to minimize them, but it's a flowing game, so I love it relative to baseball.

I started work in baseball with Bill James, and everything's the 80-20 is the better pitcher event with very little, and they're making it even more static by getting rid of the shift rules. In the NBA, we're always going to have this mix of art and science that I think is really good. Some games are almost unsolvable with data. The NFL, extremely hard to solve with data. 22 players moving at one time with very few games.

Most of the time you're just saying, I don't know, hockey is like that. Basketball lives in this perfect niche of data and art. I don't feel like I answer your original question, though, which is what makes for a great game. the thing that people don't talk about with what makes a great game is I do you think actually having rules and things that are hard to understand creates a switching cost that people don't think about. So I've thought about this in the e-sports space, which as folks know, is video games have become competitive sports and things that people tune into with full stadiums and things like that. I think League of Legends has survived through multiple iterations in 12 plus years and seems to be growing and building a forever game in a field where forever games are hard because it's difficult

to learn. So when people learn it, they don't want to exit. That's one aspect I've thought about recently. Yeah, I love that. That frictions are high to get good. But once you're good, you're incentivized to sort of stick around and that then creates nuance and I've never played League of Legends but I've watched some of them. They're like pretty damn entertaining because you can just tell how skillful they are. Well, and they've added announcers that are better and one thing that really helps the sport with like the NBA, for example, is you can be a casual watcher and appreciate the athleticism and the amazing stepback threes of Steph Curry or you can be a casual watcher, But you can also, as I know you are, be someone who understands, oh, they're running floppy action, they're running this downscreen, they're switching every pick and roll.

They're winning through transition. It has nothing to do with this. So basketball works on this multiple level. Both the diehards and the casuals can get a lot out of the game. And that's something that's, for example, like a Rocket League, which is an emerging sport. Sorry to go to e-sports. I think about e-sports a decent amount. Because it's fresh, yeah.

Yeah, I think about new sports quite a bit, which ones. are going to become as big as people say, because every new sport, like pickleball is the one now, everyone says like, this is going to be a huge sport. Table tennis has been rumored to be a big sport, and I played table tennis since I was a kid, and it still has not hit the Zitkeyes, has not found that niche, basically,

that has it grow anywhere but in the Asian region. Back to Rocket League. Rocket League has the aspect of it. It's extremely easy to understand. It's rocket cars shooting soccer balls at goals. So way easier to understand, but it also has a ton of intricacies for the diehards, basically. I don't want to overstretch the analogy between what you do in sports where there's more discrete outcomes. There's a scoreboard that ends.

There's a discrete game and investing where it's sort of always an open-ended structure and a very complex system. But there's enough overlap that we can talk about a lot of common interest in themes like biases, etc. One that's kind of unique is what I'll call like the concentration of resources. If you look at basketball for sure where maybe 60% or more of championships have been won by like a small handful of teams, or like an F1 where the very highest financed car programs are always winning, the concentration of resources seems like a key thing to understand in a given game. How do you think about that?

Is that a good or a bad? Is it just a feature of certain sports and not others? What do you think about resource concentration as an aspect of all this? I think it's the latter. The structure of different sports really dictates how important your top few key people are. Basketball has the feature of all the major sports that the top players have by far the most outsized impact, much bigger than anything in baseball. To illustrate it, in baseball, you can have guys three through 15. be extremely good and not have your top two players be the very top players in their sport and win

a title and it's happened, that literally is impossible in basketball. So the way illustrate how the top players, like a Joelle and Bede impact the game, is the following by comparing it to baseball. In baseball, if you have a top player, say Barry Bonds at his peak, who is something like plus 14 wins, some peak that no one's achieved since then, he goes to back. He goes to back. bat and then he has to wait eight more times before he gets to bat again. Whereas if Joelle and Bede comes down and scores and then we go down again, he's like, you know what, I'm still the best player. I'm going to go bat again and again and again.

That's one thing. And then even worse, it's become that the only ways to guard guys like James Hardin and Joelle Embed often is to switch ball screens. This is true of a lot of the Golden State players as well. So if you're switching ball screens, the other team can manipulate those screens and basically end up with the matchup they want. So not only does Barry Bonds get to call his own number each time and go to about nine straight times, he also gets to select the pitcher on the other team he wants to face.

So you can imagine the impact. And then just the more basic things, that there's only five players on each side versus a lot of sports have 11, some of nine. So just that as well. once you have that these players make huge impact, certain players have made almost 30 win out of 82 game impacts in our sport. It basically aligns everything to that. And I think you've had Sam Hinky on, you've had some other basketball folks on. That is why teams, when they look at how to win the title, go to these extreme lengths to make sure they're getting one of these players.

you can literally justify any activity, any investment, anything to get one of these players. What have you learned about the degree of certainty or uncertainty in that recipe? Because, for example, I think of the Shane Badiate trade we had Shane on recently, and he was just this unbelievable proven commodity that just increased wins wherever he went, but had obviously a ceiling. He wasn't going to score 30 points a game versus some, whatever it was. I think it was an eighth draft pick or something like that. It was traded to get Shane, which, who knows, Steph Curry went, whatever he went, seventh or something. So how do you think about the spectrum of uncertainty making one of these moves with sort of the championship in mind?

You are weighing championship odds. And generally, we look over a three-year time horizon with that. You could really pick any time horizon, but three-year seems to work best with the data. And we basically do a sharp ratio like you would in investing, which is like, here's our championship odds increase, here's the variance of that move. Is it on the efficient frontier of return to risk, basically? And Shane obviously fit that for us. None of our information is anywhere as good as the financial models. Actually, our underlying data is more predictive, quite a bit predictive. I talked to a lot of quants on Wall Street, and I tell them our signal-to-noise ratio using whatever measure you want.

Eyes go like, whoa, you guys are, that's incredible. And I'm like, yeah, but you remember we have to be best of 30. You guys just have to be the S&P by 2% and your geniuses. So each industry has its own challenges. But when we traded for Shane, and I don't think Shane mentioned this when he was on, maybe he doesn't even know this. We might not have talked about it. A big aspect of that was done completely on hypothesis.

I would say it's not a big aspect, but it was a material aspect. was we were trying to unlock our superstar. So our superstar at the time was Yao Ming. And basically, he's the most devastating player in the history of the NBA. If he could catch the ball within seven-ish feet of the hoop. If he caught it there, you're done because he's so big, you can't follow him. He makes 88% of his free throws. He shot almost 60%.

Once he caught it there, we could not get him the ball. And Shane, we knew, was an extremely good postpester. He hadn't really had his chance to show it a lot. He had guys like Strow Miles Swift in Memphis and, like, guys that really couldn't take advantage of that skill. But given his height, his intelligence, it's a very timing thing. It's a feel for the game thing. We felt like he could help with that and he did.

Shane actually one time famously described throwing the ball to Yao in the pain is hitting the 100 on ski ball. So, Joel Embed, for example, you could throw the ball anywhere near him and he's going to get it. He's athletic. His hands are amazing. In fact, it creates a problem until we had James. Our entry passes weren't great because everyone knew he'd go get it, but when he caught it, it would be in a bad position. James is now getting him the ball in a lot better positions given his passing skill. But basically, Yao, they would front him, they would put athletes around him, and there was a very small, tight window you had to hit and time well to get him the ball. And once you did, though, we had unlocked Yao Ming.

And obviously we had some great runs in Houston with that group. In so many of these examples where you're entering a new game and you're trying to win, just like in a simplest sense, it sounds like the thing that you would advise people first do is identify what you're optimizing for. Like in basketball, you need a superstar. And I'm sure there's layers of nuance beneath how much more is LeBron and his prime worth than like the second best player and stuff like that. And I'd be curious about that.

But in general, is that the strategy that you would advocate that you spend the first chunk of time, saying like, okay, wait a minute, what determines outcomes in the first place? And then let's build around that. Yeah, it's basically KPIs to steal the business term. I see different sports all the time, and that's 100% the first question I asked. What is your first layer? And the NBA was the first thing I did when I got the job in the NBA at the Celtics in 2002 was, okay, we know winning matters, what drives winning, point differential drives winning. Duh. And we knew that from baseball, and I had done that work in the NBA, well, is it Stats Inc? What drives point to front?

Oh, it's number of possessions times your efficiency of using each possessions. Pretty basic. Number of possessions, rebounding and turnovers. Shooting is a combination of both the mix of threes and twos that you shoot and the outcome of that. And then also, do you get to the line and how efficiently do you make the free throws? What are the leading indicators of those? Okay, then it's, are you in transition or not? Every question that I'll get in the sport, I'll say, I don't know.

you don't know the answer to. So you have to do that first. I met with some key soccer bill, I won't say the Premier League team, in the mid-2000s who were looking to do advanced things. And I was like, okay, well, your first thing,

we know goal differential is all that matters, but you have very few goal events. So you have to then first break down every shot into sort of an expected point that you're going to get from that goal. They, at the time, we're claiming to be very, man's, and they didn't have an answer to that. And I was like, well, you guys have nothing.

You have no way of knowing anything until you get that. So they do have that infrastructure now, and now they're working on the secondary and tertiary problem. So you need to, like, know what are your KPIs and then what are the key drivers of those? From the GMC, where you're especially focused on personnel decision and then working obviously with a coach and with owners, how do you think about the dynamic between the talent and the system. So very famously, there's been systems that are well-known, like Phil Jackson's systems and basketball, that seem to just kind of work, or Mike Dantonie's revolutions in the speed of the game. And I'm curious how you think the two relate to one another and how they work together. Yeah, this is part of the art of basketball that I love. Again, to compare

to baseball, I just do because they're the gold standard for using data in sports. Generally, there isn't really a system that changes, but where there is a hard problem, which is you're 100% right, that how players perform in different systems is pretty variant, but that also creates opportunity. It's not just find undervalued asset, which is famously moneyball and written by Michael Lewis, it's about finding undervalued assets in your system and structure. Basically, it allows you to zigger-zag. The way the league is going, the way everyone is going, is five out offense, switch every ball screen, basically the way the Celtics play

and the way the clippers are going right now is the direction that everyone believes is the best way to play modern basketball. And it might be. But within that, there's a ton of opportunity for us. We have the best big man in the game, I believe you can debate probably top three. And playing with a big man is actually more historic,

even though a lot of the trends of basketball, the three-pointers, things like that, all point to playing the spread offenses, switch every ball screen, bigs aren't as important, that now actually in some ways makes Joelle Embed more potent, more valuable because he faces these teams that don't have an ability to handle him. I think that's a lot of what's happening with some of these teams playing that way, struggling, that as they face more traditional teams playing a more traditional way, they struggle even though they might be doing all the right things in an optimal way. You're not only just finding undervalued players like Anthony Melton,

I believe was and was playing well for us. You're finding undervalued players that inside your system are even more undervalued. What about the whole like in business power law thing where no matter how far up the curve you go, the law still applies where Microsoft and Apple and their market cap is just like even if you compare it to like a snowflake, which is by any measure, this amazing company. Snowflakes like a pimple on the back of one of these just massive businesses. Do you find that it's that way too in superstars? I asked earlier about LeBron. You look at the finals, it's like you see a lot of LeBron and Steph Curry. You look back over the last generation. Isn't that same kind of power law, no matter how far up it you go? There's a few things that I don't love about basketball.

It is that the superstars matters so, so much that the value they bring is asymptotic in that it messes with the math completely. Even though we're trying to optimize the Shane Battiers and the De Anthony Melton's to come in and help our team, and you've heard all those ways I wax poetic, but they get wiped out instantly in a season where Yao Ming's toe gets hurt. So he no longer can turn left shoulder, right-hand hook shot. That is like an order of magnitude different. Everything is messed.

And then if you're a team, which we were before we traded for James Hardin in Houston, and then if you're a team without one of those superstars, acquiring them, and this is why you see somebody's what appear to be crazy trades in the NBA, you can basically say you should trade everything not bolted down. You're adding up pennies to try and add up to a $100 bill. You can trade everything at an organization that doesn't have a superstar to try and get one. there's really almost no crazy trade that doesn't justify. You're either in the game or you're not.

You go into the season, there's only nine, eight, something like that, even in a good year that have a chance to win. This year is a good year. Quite a few teams have a chance to win. Most years go in, there's really three or four that only have a chance to win. So I hate that about it. And then the three-pointer is absolutely out of whack. So I love the NBA will always change its rules.

Like most of these sports, like soccer is completely hooked. they have a whole bunch of things they need to fix, and they have a game that's been around since, I don't know, if you talk to England, 13, 12, and, you know, the battle-based things happened, then soccer came about, something like that. They won't change the most minor things ever. Baseball is finally getting there.

I used to make fun of baseball. They formed a committee. They studied it for three years, and they came out with one rule change. You can go to first base quickly on an intentional lock, whereas, yeah, I'll give credit to the NBA League office and Adam. We've tweaked our rules a lot over the years, whether it be adding the shot clock, which was a huge innovation, or the three-pointer was a huge innovation.

We've added major changes that have all helped the game over the years, and we'll continue to do that. And the one that's out of black right now is three-pointers. They're worth too much. Being worth 50% more than two is too much. So those are probably the two things that would change right now. Is it frustrating to operate where all the stakeholders are very deterministic in their interpretation, but your job is very probabilistic.

Like, you think about the championship as the one that you're optimizing for. You're just basically doing this big expected value calculation all the time, whereas your fans are just like, did you win or not? Well, this is why Sam Hanky's a venture capitalist right now. And I even understand the fan perspective. Their whole thing is like, I want to see a championship. I want to go to meaningful playoff games. And the other thing is with the media environment,

obviously it's a good thing. It's why people are excited about our sport and come. If we didn't have media, we'd be in real trouble. But the media environment has always been tough, but I feel like it's gotten more tough in that they will posit and ponder and you should do this, you should do that, you should do this. And I like it because I learned from it. But when they make a mistake, best case, they'll just write a column.

Like, oh, one time I thought this, but I was wrong. Oh, yeah. If the team did that, they would be out of it. 100 million. But for me, it's just a little note in a column. But that's in the best case. And most of the time, they never go back and talk about the things they said that were completely wrong. So, you know, look, decision making is hard. It's hard in every industry. But ours happens to be on the front page of the newspaper and the top trends on Twitter and things like that. As you get away from the superstars into the organizations, I'm sure those parallel curves

flatten out a little bit. But I haven't seen you talk much about. building the team that is the front office, like how you hire talent. This is where the investment organization and the sports organization actually have a lot in common. Everyone's going to talk about the returns or the games, but what goes on behind the scenes with the teams is really important in the investment teams at the front office. So when you're hiring front office staff, and you have sort of like a Parcell's coaching tree, like a lot of people that have worked for you have gone on to be GMs, what is in the sauce there? What are you looking for when you hire people? Is it unique to each person or is there like a common through line? I think the best

leaders spend a lot of time on getting the right people and then I just feel like I'm failing all the time. Like I should be doing an even better job. I think we have like five or six DMs and five or six coaches who have come through. We work together both in Houston, Boston and now here. I spent a lot of time. In fact, we're hiring right now. So if anyone wants to reach out, I'm on Twitter. I'm fairly easy to find. I'm a bit in a panic that we're getting behind on some of the latest techniques in machine learning and things like that. We have good internal people, but there's been recent innovations that I'm sure you're on top of that are turning. By the day. Yeah, some of them are turning long time. I was a predictive modeling person and statistics. They're finding completely new insights. Anyway, long story short, early on, I would find the people who are doing in their spare time what they want to do now. And that's, I think, a little harder to do in other industries, although I think with podcasting and blogging and Twitter, you can now find those people.

But if they're in their spare time, if they're like the best analysts in the NBA, I think, is still in Houston. And he was blogging in 2005 to 2007 area. And we hired him to, I still feel guilty about this, to like, a full. four-year intern contract, which I think was maybe unconstitutional or something. I don't know, but I got annoyed. A lot of our interns left. So I was like, this one seems good. We're going to hire them and lock him up to a long-term deal. That was probably the trick. But then everyone sort of copied that trick. Then I would say our two new veins of finding people were finding the

really smart kids who go to basketball schools. So whether that be Duke, the best woman I ever hired, came out of Duke, Stanford, obviously. So some of these schools that have a pretty good to very good basketball program, and the students might have selected the school based on that a little bit, and they're also super smart. So that's been a nice vein. And all of its outreach, I've had some luck just tweeting, hey, we have a job, and I've had some pretty good success with that. But I'd say that hit rate's really, really, really low, as you might expect. When you got the team built and then it becomes about decision-making at the end of the day. There's a lot that happens before decision-making, gathering data, learning, applying different

models, et cetera. We'll come back to that. But I'm really interested in, like, when making a key decision with a team, understanding that you're probably the final decision-maker or GMs in general or often the final decision-makers, what you found to be the best ways to make decisions with all the tools in your toolkit. I'm especially interested here in voting theory and voting systems in the role of the biases play and making sure you debias a decision-making process. So how has this evolved?

Maybe started with what does it look like today? How do you make a key decision in the organization? We spend a lot of time on this. Obviously, we have three tools, draft, free agency, and trade. To your point, humans are pretty bad at decisions. I'm pretty confident in that, including you have to put the mirror to yourself and realize your own biases. And those are famous we've been written about and thinking fast.

and slow in a lot of different books. So what we do currently, I have like a Game of Thrones' small council, which is right now seven key people. In fact, we're meeting right after this podcast. We always do a vote before we meet. That vote is always informed with data. The same data is available to everyone on that council. one of the council members is remote to try and fight groupthink.

Groupthink is still real, even with all these safeguards that I'm putting in, basically, because we live in this MBA world. It's sort of like a sewing circle. It's a really tight world. Everyone sort of talks about the same things within that world. So we can't really fool ourselves. There's a couple methods. So to your point, I'm voting methods, there's a mix between systems that minimize ability

to manipulate, and there's systems that use the strength of feeling. Those are polar opposites. The ones that are hardest to manipulate, but eliminate strength of feeling are like condorset methods or eul methods. And then the ones that implement strength of feeling, those are pretty simple. Those are just compare what we're doing, each sort of asset in that, compare them to a draft pick, almost like you put a valuation on something. If a company was doing it, they'd put like a dollar valuation on each one, we use draft pick equivalence because our money is messed up. We have constraints with the collective bargaining agreement that makes using dollars not very congruent. So we tend to use draft pick equivalence as much as we can. And then everyone does that voting

before you get in the room. And then when we get in the room, it'll basically spit out things like, who has the strongest feeling? And I'll let them talk first and make sure they're talking first. You'd be surprised. People, if you're in a room, a group of people, how bad that info is, unless you have some of these prompts. So I can tell you that we have quiet people in that group, but they're very comfortable voting on their own when they sit there and think through, they have some pride in being right, because we can go back and check who's looked at this. Now, it doesn't mean that person's better. Like, you can just be lucky and right. That happens a lot, too. But your track record over time, just like our track record in the NBA, where the fourth

best winning of all time among executives. So an executive has a long track record of good draft picks, good free agent decisions, good trade is an interesting thing because it's hard to be consistently good over time. So we get in the room and it's like, hey, what are you seeing? The group is lower here, but maybe they're missing a piece of info. Because you want to distinguish between you're higher on a decision because you have taken the same inputs and come to a different conclusion. That's a very different thing than like maybe they're seeing something different in the data that everyone else is missing. So those are two different things. The good judgment project is interesting, super forecasting. I don't know if you've talked to Tetlock, yeah, with the use of Breyer scores and things like that,

give you a good sense over time. So we're like a peer play. It's the lifeblood of our business, whereas, you know, in other businesses, I'd say execution probably matters a lot more. in all aspects, including coaching, a well-executed slightly suboptimal strategy generally will be the best strategy poorly executed. I mean, you know that. That's generally true in basketball as well. But I would say in our realm of decision-making, it's really almost a pure decision-making thing. This draft pick beats that draft pick. This free agent for $5 million beats that free agent for $5 million. It's more of a pure play. Sports is actually way simpler. than most of the people you talk to, way simpler.

Our sport, it changes but not much. Our data is pretty good. Our competitors aren't coming out with new products. Our competitive dynamics are known. They're hard, but they're known. We don't have the Rumsode problem of unknown unknowns, like some startup in stealth mode that might have. That's why academics have done more and more papers about sports,

because if you're trying to isolate how to make good decisions, sports is a really ripe area to do that in, including a recent Harvard paper on why, the three-point line was introduced like 40 years ago. I forget the exact amount, 50 years ago maybe. And it took teams so long to realize that this was an O.P. strategy for the game. Why did that happen? So, like, there's been quite a few papers written about that, which is interesting. What about game selection?

It seems like if you talk to a lot of the best investors, they'll attribute their success to picking the right pond efficient, the right game to play, and then over time, things that are roughly fixed, you know, the same rules or whatever, get more and more efficient. We're probably, will you tell me, like, how far up the diminishing return curve we might be in basketball or in other sports? And then just in general, how you think about game selection. You seem like someone that likes to go into a situation, figure out which variables matter, start building systems around those variables in order to win.

How do you stay interested in basketball versus saying, like, I'm going to go to this to ping pong and be like the world's best ping pong selection guy? It's the question I struggle with. I just stay in basketball because I love it. I had a recent opportunity where I might have left, and I thought I was going to be out of the game for at least a year when I left Houston. And I was like, oh, this will be fun. I'll sit on the sidelines and think through all these things.

and then the Philadelphia thing came up very quickly, and it was right before the draft, so they needed someone rapidly. So I never got to do that. The answer to your question is basketball is getting, the edges are getting smaller and smaller. Baseball's facing this as well. And that's frustrating,

especially for someone who's lived through the huge innovations, shooting optimization was worth a max contract. You could add essentially a near All-Star just through strategy. now the advantages we're trying to eke out are like a half win to a win to a win and a half at most. And so that's not as much fun. I did take a step back for the little period I did and said, like, I do love basketball and I do love what I do. So I like the people I get to work with.

I get to work with great people. But you're right. I mean, I think if you've lived through the internet when it's heyday, it's probably hard for some of the folks to start the next business that's, oh, another vertical, another vertical, this site. You know, really, I'm going to work on that. So it's probably similar to that a little bit, yeah. How much time do you spend for fun analyzing other stuff with this same mindset?

Like, I want to know your take-up movies or on other sports, like the Olympics or stuff like that. Do you find yourself drawn to just trying to figure out a new system as almost like a hobby, like it's your main hobby? That's probably what I love the most, which is why I love the MIT conference. So when I get there, it brings from every sport. And just because of my track record and being into board games and being into games since I was a little kid and I was the first video game generation and playing video games on the VIC-20 and the Commodore 64 and things like that, that I do love like, hey, show me this sport. Like cricket recently.

I got more into cricket. I was just watching in England. They have this new hundreds format. And I was watching, I was like, boy, this. They're doing this definitely suboptimally. And I felt good because I reached out to someone to come to the conference and I was like, this new format they've created, it appears no one's adjusted to. And he's like, oh, 100%.

So give a sport, figure out the key drivers. And then the other one I'm big on is just the rules. I'm always trying to tune the rules of sport so that it's more interesting to watch. There's a good tradeoff between certain things. and that depends to get everyone mad at me when I try to modify the rules of other people's sports. I've got a few modifier questions. How would you change the rules of soccer? So soccer is the one that's my bugaboo. People want to say that it has good rules and it has the worst rules of any major sport by far. So first off, off sides is impossible for casual

viewers to understand, poorly written. You can get offsides when it's not creating an advantage, which is dumb. And then just fundamentally, if you have a sport where stationing a player on the other end of the field so that they're out of the play completely is optimal, such that you have to write a rule to stop it, that means you have too many players. 11 players is just wrong. Whoever just randomly chose 11 on 11 chose wrong. I would fix that. In fact, they've already talked about fixing it. The overtime, they're going to reduce players. You notice that when they're talking about fixing their rules for all, overtime and try to make it so they don't have to go to penalty kicks. They don't talk about

adding players. They talk about taking players away. Well, that's a hint that even they know that the sport has too many players on the field and it requires you to create a Kluji rule called off-sides. Then you have the penalties. So penalties, just like in the justice system, the punishment should match the crime. The punishments in soccer are either completely meaningless. Like, oh, we just restart almost totally meaningless, doesn't change the win probability at all. Or, holy cow, the whole game is determined. Those are your only two options for your penalties. Hockey has some easy ones, five minutes out where you're down a man. There are all these options they could come to. So penalties are terrible. They have just dumb stuff like the clock counts the

wrong way. I mean, just like, honestly, they came up with a set of rules in 1610 or whatever, and they haven't changed them. And they're just poorly constructed. It's a great example of the World Cup just demonstrated this. how incredibly exciting it can be to watch a game. And then if you're a casual fan, which so many in the U.S. are, like, they're tuning in usually just for the World Cup, maybe a couple of the things. Like, what the hell is going on here? So this guy steps one foot inside the box and all of a sudden you get a penalty shot.

It doesn't make any sense. They misconstrue, like correlation to causation is a huge problem. So they'll do a few things like, well, soccer's the most popular sport in the world. So the rules must be okay. No, those don't follow. Those two things don't follow. It's the most popular. sport because it's actually a really good sport. I love, you only use your feed. It's been around

forever. There's a lot of amazing things to do with soccer, but the rules is not the thing that makes it famous. Second, they'll take the top teams, to your point on resources. The top teams in soccer are like 5x, 10x, some of their opponents at times. So sometimes even 100x, they'll be in like an FAA cup and some of these things. Like you'll see these resource differentials. And they'll be like, this team, the way they play is optimal. No, no, it's not optimal. They have way better players. So, no, you cannot use that. The analogy I use is, for example, offensive rebounds a big thing in the NBA right now. And there's a really healthy debate between getting back on transition offensive rebounding. And generally, the bias, if you look at the data, is more offensive rebounding. But it's not simple.

But a lot of the aspect that people have said is that, oh, well, all these great teams over the years did an offense rebroad. So therefore, it's the wrong thing. I'm like, well, okay, well, in 2002, that same data would have said, don't shoot three pointers because all the good teams that won the title didn't shoot three pointers. And we know that was wrong. The easiest way I describe correlation to causation in the NBA is that if you took the top teams in the league this year, Boston, us, I think, Milwaukee, Cleveland, Denver, and you said, okay, the first possession of every game, throw the ball out of bounds. That's going to be the first play of every game. Well, guess what? We'd still win most of our games. And I would say 100% of the good

teams throw the ball of the bounds to start the game. We should all be doing that. That's clearly a good strategy. So I just get so bothered by some of the counterarguments from the soccer folks when I talked to them. The rules need to be fixed. It would make your sport way better. I love the sport as it is, but it could be way, way better. What about college football or fresh off of like an overwhelming crushing game where, to your point about part of the excitement of sports is not knowing who's going to win. And everyone has sort of SEC fatigue with the same couple of SEC teams winning everything. How would you change college football?

I can't figure out how to do this right. But if a sport could come up with a good comeback mechanism, that would be huge. So the one I've thought of in the NBA is that if you're behind, you make a line near the half court line. And if you shoot it, you cut the difference in half. Unfortunately, what that would have devolve into is a lot of half court shots, which might not be all that interesting. But when an NBA team's up 30 or a college team has just happened,

is up by, I don't know, 40 or whatever it was in the second quarter, whatever it ended up being, you want some comeback mechanism. So the poor announcers aren't like, oh, there's still plenty of time left. And everyone's like, what? There's not plenty of time left. The announcers get completely screwed because these games will be out of hand. And we're supposed to pretend it's still interesting to tune in. It's frustrating.

What about outside of sport? I'm especially interested in movies and music. I think I've heard you say elsewhere, in music, there's this funny phenomenon for artist's first album tending to be their best. Why that is, and just observations you have about how those systems work. If you think about the first album, someone releases, they've had to run the Ironman triathlon, unless they have like a famous parent or something like that. They've had to drag themselves through the muck of playing in small clubs and

fine-tuning their own music while they play cover songs, most likely at points. And they've had to work their whole lives refining the first thing that they come out with. And then after it hits, they're asked to like turn around and do the same thing in one-tenth the amount of time. It just sets everyone up to fail, is my feeling on this. So this is why I got into business book summaries when I was younger, because I was like, these business books are awful. The condensed version is way better than the 300-page version that they're required to do so they can get on the speaking circuit and get paid and all that kind of stuff.

The only things I'll read that are longer fiction or whatever, basically. Do you think about business book sales as a game that is just the incentives are so horribly misaligned to produce any sort of quality? I've seen firsthand they're like, hey, buddy, can you buy like boxes of this book? I know the New York Times tries to adjust for it, but, you know, It's spy versus spy now and who gets up on the bestseller list. And then who reads a book anymore anyway? I know there's been some famous tweet threads about this, but like, does someone have

good data and who's actually reading books anymore? It has to be like vanishingly small. The Kindle data, which they have published some of, is horrible. First, you've got to buy the books. And no one even buys the books. But once you buy the book, it's a single digit percentage of the book gets read. Percentage of the words in the book get read by the reader. Like, no one's actually reading these books.

We see it in podcasts. Like, we want to see 90% or more of the people that start an episode finish it. Like, that's good. In books, it's like nothing. Like, nobody ever finishes anything. I was talking to Ben Thompson about this. I was reading Stratory. And then he told me, oh, I started the podcast.

And it's just me reading the thing I write. And I was like, people do that. And then I started doing it. I was like, this is great. I can do it on my way to the conference. shop and on the way to work. So it's actually better for the times when my years aren't occupied and I'm just having to drive to work. I'd love to ask you about the advice you might have for the management of one's career. You've had a really interesting career with a pretty clear through line. You're sort of

applying this same curious filter on lots of different domains, maybe basketball most dominantly. What would you tell people that have that spark of curiosity that are beginning a career or switching your career or something that you think has been a productive thing or things that you think you've done wrong, things not to do when just managing oneself and managing one's own career. The number one thing that I tell, especially younger folks now, and that's to not accept the operating system that you've been handed. So of course, I have to think about it in the computer science way. I happen to, in my opinion, be born without a lot of the basic instincts that other people were born with, for whatever reason that might be. I wasn't very natural getting to know other kids.

I wasn't very good as a child. Just, again, common sense type stuff weren't common to me. And so I learned at a young age that I had to like learn all these things on my own. I was always constantly replacing the thing I was doing something better. It became very natural to me. And it took me a while to realize other people maybe don't do this. So this is why it's become maybe reasonable advice for people. They tend to do things when they're younger, where they're like, this is the way I do things. When I go to parties, I'm not the one as obsequious to go talk to there because that's what other people do. I'm not that person. They develop their own brand image in their head. I'm sure there's better psychology terms for these things. And the thing I try to

help young people realize is that you don't have to keep that same script. You can become inconsistent to your past. So just because you are always the guy who did X, and that's become part of your brand, and you feel like that's almost part of your ego, not ego in the negative sense, but the thing that you are as a person, you can replace those things over time. The reason I started with that is that I'm constantly, and generally the people I like to hire, they're constantly saying, here's how I operate, here's my mental model for how this business works or how this way. works. But as soon as I hear something that could be, I'm looking for how to adopt it. I'm looking for just like in an operating system, there's a file system, a way files are managed

or a way that you retrieve data using your data structures. As soon as I hear a better one, I'm going to see maybe that one I can replace with the one that I'm using now. You'd be surprised. People don't even realize that they can take a step back and change the personal brand or their personal way that they're operating. So I'm always curious about this question of things that happened to people that seemed bad at the time, but turn out to be very good with the benefit of hindsight. What is that for you? Is it that where you grew up that you described or does that bring something else to

mind? No, that's 100% it. And when I tell my kids, my struggles as a youth, they don't really believe me, I think. They only know me. It's all worked out. Yeah, yeah. It's all worked out. And it wasn't until I was probably 16 or something that I felt like I even had a friend or two that I could rely on.

So people tend to hire like and that I try to control for that because it can be a bad thing, a very bad thing. Obviously, my kids are going to have everything and do have everything and they're older now. I find that I can't help that much because they have not had to struggle on certain aspects the way that you or I did. Everyone is going to have a different journey and struggle set. And mine is so different from theirs that I actually often have trouble giving them any sort of meaningful guidance at times. I'm really interested by this notion. You're a perfect example of very high agency or independent-minded people, like people that would show up to a situation and just sort of wonder about something from first principles, like in every situation, like they almost can't help themselves. And these people tend to become very resourceful.

And one of the questions that I saw somewhere recently that I think is a great way to source podcast guests is the following. If you were stuck in a prison in a third world country and you had to call just one person to get you out, who would you call? I would probably call Deepak, Mulholtzrod, Harvard Business School, negotiation. I've been through some very, very tough times famously that people could Google me. he's got a way of thinking through and solving problems and creativity that's super helpful. And his Rolodex isn't, it's not like he's speed dialing Obama or something like that. But I think he would help me think through like, okay, you've got to, whatever the trope in movies that might be true, he'd be able to tell me, you got to beat the crap out of someone immediately or they're going to take advantage of you or whatever it might be like.

It was really closer actually to a terrible story. Brittany Griner, who was, I think, for a short time, it turned out, thankfully, was put into, like, one of the worst situations in the world in Russia and what she had to figure out and think through, I don't know her at all. So I don't know. But yeah, you're at Penn & Pitt, right? I always go back to first principles on everything. It's why I'm such a free speech advocate. People are too quick to, you know, and Stephen Covey and Ben Franklin and others had this where you want to always have a gap between stimulus and response in your life. You never want to respond immediately. It's one of the things that makes us the top species on Earth is having that gap in almost every animal doesn't.

And I think that happens in social media and all these places where people have eliminated that gap. They just go straight to anger or outrage or whatever that drives clicks versus taking a step back. I'll give an example, Trump on Twitter. I hated Trump on Twitter so much. I mean, I can't even tell you how miserable my wife was that the guy I don't follow on purpose would end up in my timeline all the time with the dumbest stuff ever. And the fact that I had to pay attention to that he's the president drove me absolutely bonkers. but I completely thought it was the wrong thing to have him off Twitter because if you think about the larger principles at stake, it's the wrong thing. I hated every moment of it,

but not enough of that kind of thought process happens where people say, someday this apparatus that's now conveniently helping me might get turned against me. If you don't have these first principles, you can get completely lost in those kinds of decisions. You mentioned the dean at Harvard. And I know... Not the dean. He's a professor. Professor. I know you took a negotiation class there. What stands out in memory from that? What was that experience like? Why'd you do it? What'd you take from it? So it was the MBA lockout in 2011. And I was like, how can I make this the most productive thing I can possibly do? I was pretty self-taught in negotiation. And I felt like I had read all the books and done enough. But I was like, you know what? Maybe I haven't. Maybe I can pick

something up. And that turned out to be absolutely the case that I took a two-week. You literally live in a dorm at Harvard. It's sort of an interesting program that Harvard's put together. You get thrown in with a bunch of people you'd have on your podcast, executives, and you take on negotiating problems. I found it to be extraordinarily helpful, but probably mostly for meeting Deep Hook. And at some level, I sort of broke things. Everyone had different expertise is coming in. There are certain things that I like knew cold and tried to stay in the background, but then they put us into groups and make you do exercises. And I was like, okay, this is not a good exercise. But a lot of them were good. Probably the most valuable one besides

Deepak's course was on the implicit biases we all have. Just some really crazy ones that I don't have heard like if people's eyes are near their noses, people just naturally discount what they say. And that's been studied heavily to the point where like everyone's like, are my eyes near my nose? Look, I mean, we're these evolved creatures and we see them. We're tribal, which has been the buzzword of the day. But that's very true. It's much easier to create in and out groups and be part of a team to bring our sports analogies. when I saw politics turn into like all the craziness around Trump and even a little bit before

Trump, it reminded me completely of sports. Everyone says crazy-ass stuff because that drives interest. Whether it be Stephen A. Smith, who's like, actually a super smart guy knows exactly what he's doing. He's hacked the KPIs of being a top sportscaster. It would be the first thing you would do, Patrick. If you were like, okay, now you're going to be one of these ESPN talks. head sportscaster, you would absolutely figure out in the first one, two days of studying it, okay, I just have to say the craziest stuff with the slightest shred. Kernel of truth. Carnal of truth.

And I'll just do that over and over and I'll be making $10 million a year at some point. You would figure that out instantly. And that whole model felt like it came to politics. Politics used to be there was this shred of we're trying to accomplish something bigger for people in the world and the country. But unfortunately, that got drowned out by the incentives of the structure, which is just winning your primary, winning this all required attention. It was all the attention stuff that sports and innovated first.

So anyway, back that class was a big one, was all these evolved biases that if you have to consciously work as a human to overcome these biases, almost for sure no one's doing it because no one likes to do conscious work, especially. in certain areas of their life. And that was a big one. Just all these heuristics that we've developed and evolved that you don't even know are there. And I started thinking of draft picks. I'm like, do I think this draft pick is worse?

I know this is a case. Billy Bean talks about it really well, that he benefited from this. He looked like the perfect draft pick. And he does, even when you see him older, he looks like a guy who could still play. And these heuristics of watching the. these players, even how they move and how fluid their movements are, can really trick you to the point where I use Michael Lewis's principle, which is like, if there's a player who looks completely different, succeeding in their area,

they're probably even an extra cut above everyone else in that industry, because they've had to battle that bias each step and overcome. It's like women breaking into many industries or minorities breaking into industries or anyone who looks different breaking into anything, you have to be extra good relative to everyone else or the immune system of that industry is going to reject you. The T cells and the white blood cells are going to come and they're going to make sure you are eliminated from that area

unless you are way better than everyone else. On the negotiation class, was there any one thing that was like an aha moment for you that you've used since that you would recommend people think about when negotiating? I'd say probably the number one I liked was post-negotiation negotiation, so that's after you shake hands deal. Often during the negotiation, you have to sort of not be super clear sometimes about your true values of certain things. Once you have a deal, though, and you actually, there's trust on both sides, and that's true in basketball because it's a repeating game. So once there's trust and you've said deal, then you can say like, okay, we have a deal.

that deal is always going to happen. But now that we have that deal, I will be more open to how I'm valuing all my things in the deal and other possible ones. If we can come up by working together and now every card's on the table, a better deal, let's see if we can do that. I'll give an example. In our sport in the collective bargaining agreement, there are certain players you have to put in just to match salary. And the proposal we made that you said deal to, we included this player. But we're actually just as fine to include these other three players.

If you want to select that and maybe you make the second round pick that you include slightly better because you're going to get a slightly better deal here, often it's a little hard to do because sometimes our deadlines get in the way. Once you have a deal at the trade deadline, for example, they won't let you modify it. But if it's a deal done around the draft, you can do that. But yeah, I would encourage, and I've seen this in many industries, people don't do this, that once a deal is done, try to then negotiate a slightly better deal for both sides. As I think about who I want to go after in the world and learn from,

I'm most curious for people like you, who intrigues you in the world? If you were putting together the classic four-person dinner party with you and three others, what to you would be like the perfect night for you? And you could know these people or not. What three people would you pick? And I'm curious kind of why. I'm really interested in talking to Gauss. The distribution.

Well, no, not the distribution, but because he was thought to be one of the smartest people ever lived. So I just want to see if the hype lives up to it. So that would be probably one. I would want to talk to Ben Franklin. His style, at least as far as I've read it in history, fits mine the most, at least as it's evolved. So my style is very much evolved. I tend to hang back a lot.

I tend to let the systems operate and do little nudges to take Richard Thaler nudge sort of paradigm out there. I tend to let things play out when it's part of the system that I think is functioning operating well. And then only get very involved when I see it's heading in the wrong direction or some macro thing is being missed that could lead to a bigger thing. And when you read history, the lore is that Ben Franklin was extremely good at that. He's not even thought of as a good negotiator, Ben Franklin, but my sense from reading history is he was.

He seems like he, like, saw the Matrix in, like, an interesting way. Oh, and he's one of the all-time great inventors. That's two. I know this is maybe the hot one. I'd probably want to talk to McNamara or Oppenheimer. Well, can I have five? Are you counting me as the four? Give you five.

Okay, I probably have both. So I'd want to talk to McNamara because he famously maybe used data. They paint him as somebody's data incorrectly. And I'd want to find out if that's true. I'd want to, like, get his take and draw my own conclusion on whether or not he applied data incorrectly or he's just been sort of painted as someone who hit on 11 and got a three. You know what I mean? And then Oppenheimer, you know, I know there's a movie coming out now, but I read the history

of the making of the atomic bomb and his ability to mold. things that are almost unmoobilizable. I'd want to know how much of that was the will he put into it and how much the signal, how much is noise to what he did generated that outcome. Hell of a dinner party. I'm picturing the table and the meal. It would just be like so amazing to be at that table. I knew that this was going to happen, which is that we're going to talk for an hour

and a half and I'm going to get through like one third of the topics that I wanted to cover, but still great nonetheless. That's completely my fault. I tend to just talk. Not at all. We'll do follow-ups in years to come, I'm sure. I'm forced, sadly, to go to my traditional closing question. What is the kindest thing that anyone's ever done for you?

I would probably reference Sam. So Sam Hinkie has a very famous letter that he wrote to ownership that he didn't want public. But this is part of his thing. And I haven't been able to replicate it, even though I want to. He wrote me a letter when he left Houston to Philadelphia that is still in my safe. like who puts a letter in their safe and still in my safe. It was very kind of him to take the time to do that. Yeah, I've had him a few times.

And I think people that listen to that can understand the degree to which I have a friend that says, excellence is defined for each person by the most excellent thing they've seen. So if you've seen something more excellent, it's actually an advantage for you because it stretches your definition and the definition that you then go to fill up. And I feel like that was Sam in a lot of things. but maybe most of all with interpersonal investment and dynamics. So love hearing that answer, although I'm not surprised by it. I'll remember that one for sure.

Daryl, there's been a total blast. Thank you so much for the time, and I cannot wait to do a follow-up. Thanks so much for having me, Patrick. It's been too long. I have a long-time listener. First-time caller. Thanks so much. If you enjoy this episode, check out JoinColossus.com.

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