Holding Court: How the NBA Builds Teams

Jules van Binsbergen: Welcome, everybody, to our podcast, All Else Equal. My name is Jules van Binsbergen. I’m the Nippon Life Professor in Finance at the Wharton School at the University of Pennsylvania.

Jonathan Berk: And I’m Jonathan Berk, the A.P. Giannini Professor of Finance at the Graduate School of Business at Stanford University. So Jules, why do we call this All Else Equal?

Jules van Binsbergen: Well, because when people make decisions, they often have a need to simplify the problem. And one way to simplify the problem is to just only change one thing at a time assuming that all the rest stays the same. But the problem by making such a decision that way is that when you ignore those other things adjusting, you often end up making the wrong decision.

Jonathan Berk: When you make a decision, the world around you reacts. It’s not just the world is changing constantly. It’s the world changes because of the decision you make.

Jules van Binsbergen: And so, over the next few episodes, we’re going to explore a number of important business decision-making situations where we’re going to find that ignoring the reaction of the world around you is going to lead you down the wrong path.

Jonathan Berk: Jules, I think the best way to communicate what this mistake is all about is in a context of a very specific example. And the example I have in mind is putting together the best basketball team of all time.

Jules van Binsbergen: So, how would be go about that? Because these days, there’s so many statistics and so many different things that you can look at in trying to make that decision. What do you think is a good statistic to start off with?

Jonathan Berk: Well, I agree. I think statistics is the place to start. I mean, after all, analytics is the way of the future. So, why don’t we start with what seems to me the most obvious statistic, which is field goal percentage? So, for listeners not that familiar with basketball, field goal percentage measures a player’s ability to put the ball in the basket, that is, the number of successful baskets divided by the number of tries. A good player is going to make most of the baskets he tries, and so will have a high field goal percentage.

Jules van Binsbergen: So, if we could find a number of players that have a super high field goal percentage, one would think that if you would put those together in a team that you really get a very good team.

Jonathan Berk: Well, if we use that criteria, the team will consist of DeAndre Jordan, Rudy Gobert, Clint Capela, Montrezl Harrell, and Artis Gilmore.

Jules van Binsbergen: I’m not sure that was the team that I had in mind, Jonathan. Where’s Michael Jordan? Where’s Kobe Bryant? Where’s Julius Erving or Larry Bird? Where are all those players?

Jonathan Berk: Yeah, this is a good team, but [it don’t] consist of the people we were thinking of, so something is going wrong here. If you look at the statistics and you look where Michael Jordan is on the list of all time field goal percentage, he’s 156th.

Jules van Binsbergen: So, what’s going on here? So, what are we missing?

Jonathan Berk: Well, this is a good example of all else equal thinking. Let’s think about this. Holding all else equal, you’d rather have a player with a higher field goal percentage than a lower field goal percentage. But the problem is, you can’t hold all else equal. In this case, the defense adjusts.

So, let’s take Michael Jordan, for example. Through most of Jordan’s career, he was double covered, which made it a lot more difficult for Jordan to sink baskets. And therefore, that lowered his field goal percentage.

Jules van Binsbergen: That’s right. And because Jordan was double covered, that also meant that somebody else, like Scotty Pippen, was not covered at all, meaning that it was easier for him to sink baskets, increasing his field goal percentage. If you think about it, it’s actually quite impressive that Jordan was ranked 156th despite the fact that he was often double covered.

So, clearly the competition responding is one example of all else equal thinking, but there is another one. And the other one is, can I just take all these players, take them out of their usual context, put them together, and suddenly think that that team will function as a team? In other words, team players have synergies together. Can I just pick five stars and expect these synergies to carry over?

Jonathan Berk: No, I don’t think you can. So, there is that as well. I would say the more important point is that when you make a decision, your competition will respond. So, any business decision you make, you cannot think of making that decision in isolation. Because your competitors in seeing your decision are going to adopt different behavior, and you can’t ignore that response.

Jules van Binsbergen: Yeah, and it’s not just your competitors. Right? I mean, for example, if you change the price of your good as a business, you should expect your customers to respond. And there’s also relationships with suppliers. All of these different players that you’re interacting with in a competitive environment are all going to be responding to the decisions that you make.

Jonathan Berk: I know. And in some cases it’s obvious. I mean, everybody understands if you raise your price, your customers are going to go to your competitors. Or if you lower the price, maybe your competitors will lower their price, too, and so you won’t get any more customers. That’s a pretty obvious situation. But what we’re going to do in this podcast series is talk about situations when they’re not so obvious, for example, field goal percentage. To a naive basketball fan, that would seem like a really good criteria for picking a basketball team.

Jules van Binsbergen: But if we think about it a little deeper, then we can come up with a better measure of how to measure the skill of a basketball player. So, what would that measure be? It is the number of team baskets scored when the player is on the court, regardless of who scores that basket.

Jonathan Berk: And that measure obviously takes into account the defense adjusting to any one player. Of course, the manager will adjust the players he plays in response to who the offense is putting on the field, so that’s not a perfect measure. In any event, this is what people called unintended consequences. And obviously, it’s sometimes very difficult to predict how your decisions will affect the world. But with that said, I would argue that many times what people call unintended consequences are really not thinking through the problem and understanding how your decisions affect other people’s behavior.

Jules van Binsbergen: Yes. Unintended by who is the question. Because clearly, if you thought through a decision-making problem from your competitor’s perspective, there is indeed absolutely nothing unintended about it. It’s fully intended how they’re responding to what you’re doing.

Jonathan Berk: So, this is a good time to introduce our guest, someone who’s actually made decisions about putting basketball teams together.

Jules van Binsbergen: Indeed, because our guest today is Billy King. Any basketball fan will know Billy. He was a general manager of the Brooklyn Nets and the 76ers where he was also team president. He started his high school basketball career in Northern Virginia, and then went to Duke to play for Coach K who became a major mentor for him. After briefly playing in the NBA, he started a coaching career. He coached at Illinois State and started working with Larry Brown and became assistant coach at the age of 27. He worked his way up quickly and he became a general manager at the 76ers at the age of 32. Billy, thank you for being with us today.

Billy King: You’re welcome. It’s exciting. You don’t always get to do a Zoom with two distinguished people as you guys.

Jonathan Berk: Well, we’re jumping onto a Zoom with a distinguished NBA general manager, so we’re all in the same boat

Jules van Binsbergen: Yeah. Indeed. So Billy, what we’d like to have your input on today for today’s episode is how do you put a successful basketball team together? And the reason why we’re focusing on this is that putting successful teams of people together is one of the most important business decisions that managers need to make. And so, we’d like to hear from you in the basketball context what are the key tradeoffs that you face when you put such a team together?

Billy King: I’m a believer that you’ve got to take everything in account. You’ve got to take the eye test and you’ve got to take the analytics. I was a big believer in psychological testing as well. And I used to always say in draft rooms, because guys would start arguing their point and they’ll come up with different things. I say, “Let’s not focus on what a guy can’t do. Let’s focus more on what a guy can do.”

Because if we’re going to focus on what a guy can’t do, we can always come up with numbers or an eye test or a tape that prove that this guy can’t play. Because I think so much of putting teams together comes down to personalities, especially on the court. You can have the five best players in NBA. If they don’t get along, it’s not going to work because personality —

I will use Coach K, for example, I played with at Duke. And he always had a metaphor that he said, “It’s like having five fingers on your hand. If you go to punch a wall like that, you’re going to break your fingers. But if you make a fist, you’re going to have a better impact.” And that’s how he always talked about it, that in order to win we got to be together.

And I think that, to me, is all the data, all the stats that go into it, whether it’s in business, sports or whatever, you’ve got to get people to realize that the big is better than them. I think so many times you can have the individual goal, individual belief in yourself, but you’ve got to put it within the team for it to work.

And you guys have seen it in classrooms. There’d be one student that’s trying to impress you and they’re answering every question, and the rest of the class gets annoyed with them. And then eventually when you go to a set of projects, nobody wants that person in their group because they’re like, this guy is not going to work well in a team.

And the best groups that you probably have on projects are the ones that spend time together, work together, and they all bring something to the table. So, that, to me, is [when I’ll] always look at trying to build teams is who is willing to sacrifice for the good of the team? And I would tell guys on teams, the object is to win. And if we win, everybody’s going to make money, everybody’s going to have success.

Jules van Binsbergen: So, that’s a great point, Billy. So, one thing that we discussed before already is this idea of what are the synergies that the team is going to bring to the table? And the way that you described this was, if you make a fist you can punch through the wall, but the individual fingers cannot.

And one thing, of course, is that if you put a team together and you take the players from all over the place like we did in our exercise, how do we know whether those fingers make a good fist together? Maybe it’s not a particularly strong fist that we’re getting. The only way to figure out how strong the fist is, is to actually have the players play together.

And another thing that I think you brought up that was great was that the way to get a sense of how valuable those synergies are is through the psychology of the players. Because if the players don’t work well together, then of course, in the end the fist is not going to punch very well. And so, I think that was great.

Jonathan Berk: And to add to what you both are saying, you could think of the synergies as an all else equal mistake. Right? Because if you act selfishly, holding all else equal, selfish behavior will get you ahead. But you can’t hold all else equal. If you’re selfish, other people are going to react to you differently. And therefore, in the long term, it is not in your interest to act selfishly. It is more in your interest to act cooperatively and increase the synergy. And so, people that understand that reaction are better team players and work better on teams.

Jules van Binsbergen: And so, from a managerial perspective, I think one way to [guard] at this effect is also how do you set the incentives in the team? How do you make sure that the players are properly incentivized to act in the interest of the team? Bill, do you have any thoughts on that?

Billy King: Well, the problem when you get into professional sports, there’s two things that sometimes work against each other. One is the business of selling tickets. And so, when you’re in the business of selling tickets, sometimes the business that you want that star that’s going to sell tickets. And so, if you get one that sell tickets, you get two, you sell more tickets, three, and so on. So, sometimes getting those stars is great for the business side, it may not be as good for the basketball side.

And so, like the Giants, nobody had them doing what they’re doing. And that’s the beauty of, say, the New England Patriots. And I think the reason they had such success during the Belichick and Brady era is that Brady had the understanding that he needed the team in order to win. As good as he was, he needed that team. So, he was willing to sacrifice some of his money and restructure his contract so they could get guys in. And he was willing to tolerate some of the things that he may not have liked from Belichick so they can win. And Belicheck, same thing with Brady.

But they realized at the end of the day New England was more important. And I think it was all led by Brady. And everybody knew, he can be treated a certain way, they all had to be treated the same way. So, that, to me, is a guy that said, “Okay, the team is bigger and more important than me,” and he was the leader of the team, and that’s why they won.

Jules van Binsbergen: Yeah, it’s very interesting. As we many times teach our students, aligning incentives is really what matters to get the objectives that you like. And as you discussed, it’s not even clear that always all the incentives are aligned. If you want to achieve ticket sales, that maybe something different than winning games. That’s a very interesting aspect of this.

Billy King: Yeah. And the one thing I used to try to do with player’s contracts after [they’re eligible in] bonus structure, always try to do bonus structures that were more team-oriented than individual-oriented. Because I think if you did a lot of individual, then guys, that’s all they would strive for is they wanted that bonus.

Jonathan Berk: You raise so many interesting points. One of the most important things I try to impart to students is, I call it leadership is everything.

Billy King: Yeah.

Jonathan Berk: Without a leader, there is no hope of doing anything. And with an effective leader, you can achieve an amazing amount with mediocre people, because leaders know how to motivate, and they know how to get teams to work together. And I think that skill is so rare and is why it gets paid so much. Right? People criticize CEO pay. My feeling is I think CEOs are underpaid, not overpaid. Right? It’s so rare to have that ability to turn a team, an organization, into an effective unit all working on the same thing. If you can do that, the value you create is just enormous.

Billy King: No, you’re exactly right. And I think back to Coach K is someone I think he’d be successful no matter what business he was going to go in because he’s a great leader. And that’s really what a head coach is in the pro ranks or whatever. It’s just someone that’ll lead. They don’t have to be the best X and O, but they going to be able to lead people. Because you can be a leader, if nobody is going to follow you, then you’re not a leader.

Jonathan Berk: What insights did you gain in the professional realm that you use outside of basketball?

Billy King: I think the biggest thing is to treat people how you’d want to be treated, no matter how good a player they were or how bad. I try to treat them all — It probably goes back [to always] Coach K is I try to treat them all fairly and not equally. Because I think you can’t treat everybody equally; you got to treat them fairly because everybody does things differently. If somebody is late all the time, I can’t treat them the exact same as somebody who’s on time all the time. I remember when he said that and it stuck with me, Coach K. He said, “You got to treat them all fairly, but you can’t treat them all equally.”

Jonathan Berk: That’s very good advice.

Jules van Binsbergen: Thank you so much.

Jonathan Berk: Thank you so much for doing this.

Billy King: You’re welcome. Thank you.

Jules van Binsbergen: So, we now have a pretty good idea of the damage that all else equal thinking can do. Now we’ve introduced a concept in the context of a simple, relatable example, which was how to put together a basketball team. But of course, given the fact that the podcast is about business decision making, over the next few episodes we’re going to focus much more on real life business decision-making contexts. And one of the next ones that is going to be an important one is going to be how do you put together an optimal stock market portfolio. And as you will see, when people often put these portfolios together, they also make all else equal mistakes.

Jonathan Berk: Our guest will be Cliff Asness, founder and managing principal of AQR Capital Management. Cliff is widely recognized as one of the most successful money managers alive today. To be a successful money manager, it’s important to avoid a particular all else equal mistake. And so, it’ll be interesting to get Cliff’s perspective on that mistake.

Jules van Binsbergen: Thanks for listening to the All Else Equal podcast. Please leave us a review at Apple Podcasts. We love to hear from our listeners. And be sure to catch our next episode by subscribing or following our show wherever you listen to your podcasts. For more information and episodes, visit allelseequalpodcast.com, or follow us on LinkedIn.

The All Else Equal podcast is a joint venture of Stanford University’s Graduate School of Business and the Wharton School at the University of Pennsylvania, and is produced by Podium Podcast Co.