I’ve talked before here about the book Moneyball. It was, in every sense, a baseball book. It is the story of a guy who runs a baseball team, and includes lots of anecdotes about individual players. At the same time, it was an allegory that can be applied to just about every other situation where we try to assess value, particularly when it comes to people. The book illustrates an extreme case where nearly all the data needed to judge which two people better exhibit a skill is available, and most people ignore that data anyway. The unspoken question that the book poses is whether we’re really as good as we think we are at evaluating talent in any enterprise. Needless to say, the book has sparked much interest among economists. Zimran Ahmed points out the uncomfortable fact that testing and statistical analysis are probably preferable to interviewing when it comes to hiring candidates for jobs.
Of course, the problem is devising a test that will be more effective than interviewing in doing the evaluation. The advantage in baseball is that the tasks involved lend themselves to record keeping and quantitative analysis. The other advantage is that the way you become a major league baseball player is playing baseball at lower levels. One of the great revolutions in baseball analysis was the realization that college and minor league baseball statistics are incredibly useful in projecting the performance of a major leaguer. While that may seem obvious, until very recently most teams preferred to ignore those stats and instead judge players based on how they looked to scouts rather than on how they fared against their competition.
Anyway, it’s much more difficult to project how a college student studying computer science will perform as a software developer, or, I would imagine, how a vice president of sales will perform as a CEO, since there’s no easy way to quantify their past performance and then project how they’ll do in their new position. That being said, there’s a huge economic incentive to try to figure out a method for improving the quality of these sorts of decisions. I think that the ultimate result would be to adjust executive pay downward over time. What Moneyball teaches us is that if you ignore the fluff and get down to the concrete value that a player brings to a team, you can obtain nearly the same amount of value (and sometimes even more value) as marquee players bring to the table for a fraction of the price. I don’t see why we won’t see the same thing when it comes to business executives.