Thursday, September 30, 2010

The Power of Statistics

We all know the catch phrase “lies, damned lies, and statistics.” It is typically used to mean that statistics can be manipulated to support any proposition and should therefore be viewed--presumably--with some degree of skepticism.

And that’s a concern for those of us seeking to harness the power of statistics to analyze contracts and other documents.

So I was intrigued when I came across Michael Lewis’s book Moneyball-The Art of Winning an Unfair Game (2003). I enjoyed Liar’s Poker (1989) and look forward to reading The Big Short: Inside the Doomsday Machine (2010). I confess to reading a synopsis of Moneyball on Wikipeadia. It summarizes the book:

“The central premise of Moneyball is that the collected wisdom of baseball insiders (including players, managers, coaches, scouts, and the front office) over the past century is subjective and often flawed. Statistics such as stolen bases, runs batted in, and batting average, typically used to gauge players, are relics of a 19th century view of the game and the statistics that were available at the time. The book argues that the Oakland A's' front office took advantage of more empirical gauges of player performance to field a team that could compete successfully against richer competitors in Major League Baseball.”

The application of math and statistics to literature, art, and even sports is often greeted with skepticism, doubt and sometimes nostalgia. For example, Bill Simmons of ESPN writes in Finally joining the revolution: “I longed for the old days when you could say things like, ‘I hate watching J.D. Drew -- when is that contract going to end?’ and there wasn't some dude lurking behind me with Drew's stellar OPS, VORP and WAR numbers saying, "Well, actually ... "

Simmons is now a convert and is convinced by the insights offered by sabermetrics.

Reading these articles also made me think of a piece in the Wall Street Journal titled, Contract Doesn't Let Board Fire Mann CEO for Jail Term, in which the authors appear outraged that “[u]nder the terms of the employment agreement for Louis Lower, the jailed chief executive of Horace Mann Educators Corp., serving a 60-day sentence on a drunken-driving charge isn't grounds for firing—or for losing any pay.”

If the authors harnessed the power of empirical evidence, they would discover that termination for substance abuse is rare, appearing in less than 5% of CEO contracts. Stewart J. Schwab and Randall S. Thomas report on their analysis in An Empirical Analysis of CEO Contracts: What Do Top Executives Bargain For?

Some contracts may include commission of a felony as cause for dismissal and termination of pay; but typically a DUI is a misdemeanor and in some states it carries a mandatory jail sentence.

While contract analysis is a very new field, it will likely offer new insights on precedent that we thought we understood thoroughly and it may question our long-held beliefs.

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