Catching up on missed reading and came across this exchange between Bill Simmons and Malcom Gladwell. Gladwell is a famous writer, but his talents are most obvious when commenting on sports – there are several other excellent social commentators, but a comp set that includes Dan Shaugnessy offers far more room to excel. Here is Gladwell on the full-court press in basketball:
one of the most common responses I got was people saying, well, the reason more people don’t use the press is that it can be beaten with a well-coached team and a good point guard. That is (A) absolutely true and (B) beside the point. The press doesn’t guarantee victory. It simply represents the underdog’s best chance of victory. It raises their odds from zero to maybe 50-50. I think, in fact, that you can argue that a pressing team is always going to have real difficulty against a truly elite team. But so what? Everyone, regardless of how they play, is going to have real difficulty against truly elite teams. It’s not a strategy for being the best. It’s a strategy for being better. … I wonder if there isn’t something particularly American in the preference for “best” over “better” strategies. I might be pushing things here. But both the U.S. health-care system and the U.S. educational system are exclusively “best” strategies: They excel at furthering the opportunities of those at the very top end. But they aren’t nearly as interested in moving people from the middle of the pack to somewhere nearer the front.
I might simplify the argument: the full-court press is a strategy that increases volatility but reduces the expected value.
In general, a team running a dedicated full-court strategy is going to lose. In fact, it’s going to lose by a greater margin than if it had played a standard defense. Let’s think about the game: the number of possessions is almost exactly even among the teams. The press does little to help your chance of scoring, unless you believe that your team is better-conditioned than the other team and the other team’s defense will degrade more quickly than your offense. Even this is unlikely, however, because as the pressing team, you have to commit to chasing the other team all over the court, while during their turns on defense they chase over much less territory. The non-pressing team will get a lot of easy baskets, since there are fewer defenders in any segment of the court, including the segment near the basket; on the other hand, it will make a lot more turnovers. It takes an extraordinary series of events for the turnovers to compensate for both the easy scoring opportunities and the difference in energy expended.
The question of why teams do not press is therefore different from a typical social behavior question such as why NFL teams are so reluctant to go for it on fourth down. Going for it on fourth-and-short (4th & 2, 4th & 1) anywhere outside your own 35 (basically, outside the other team’s immediate field goal range) is expected value positive. Problem is, it is easy to second-guess when wrong, and coaches who get criticized enough on talk radio get fired. The extra win a year from following the strategy would be drowned out in the career-ending blowups it could cause.
The full-court press strategy has been tried with some success. Let’s think of Loyola Marymount, which went to the Elite Eight of the NCAA tournament in 1990. First game: LMU 111, New Mexico State 92. Then LMU 149 (!), Michigan 115. An odd game against Alabama, winning 62-60, then up against stacked UNLV: a 131-101 loss. Yes, these were forty-minute games.
The amplitude of each game was increased. The margins of victory: 19, 34, 2, 30 were wild. Look at a team from a similar spot in the bracket who also lost in that Elite Eight, Minnesota: 3, 3, 7, 2.
The insight of the strategy was that LMU was likely to lose. It was lower-seeded than its opponents. The Michigan team that it ran off the floor was #3 in the bracket. A conservative game would have lost by a respectable margin. A conservative game would also have allowed for a less astonishing loss to UNLV. Only by recognizing and accepting that in a head-to-head matchup the team was bound to lose was LMU able to see the virtue of a strategy that simply increased the distribution of outcomes.
Think of pulling the goalie in hockey. The volatility definitely increases: with six skaters on the ice, a team is more likely to score. Of course, with no goalie in the opposing net, the other team is even more likely to score. So the probability of a goal in a given unit of time goes up, as does the probability that the goal is scored by one team – the team with five skaters and a goalie. It’s a lousy strategy when both teams are evenly matched. But if a team is trailing by two and has two minutes to play, it’s the only strategy with a nonzero chance of success.
Now let’s think about this in terms of politics. Or, better yet, war.
As discussed in The Guns of August, Germany mobilized its troops on July 30, 1914. Two days later, on August 1, France mobilized its own troops. In those days of rail transport, it would take a few weeks for soldiers to get in position. However, war had been expected for years; generals had plenty of time to pencil out the game theory and play war games and otherwise work out the strategy. This is what the German and French plans look like superimposed on each other.
Notice how the blue lines go northeast? The Schlieffen Plan – the German invasion of France – envisioned a large counterclockwise attack descending on Paris. The French reaction plan for an invasion (Plan XVII) was to launch an immediate invasion of Alsace/Lorraine.
You could well be forgiven for thinking that this plan was predicated upon an invasion coming through Alsace/Lorraine, and it was only through rotten luck that the invading army was well to the north. But that’s not the way things happened. Wherever the German invasion took place, the French idea was to quickly try to seize the territory it lost in 1871.
Let’s take a moment to admire the multilevel stupidity of this approach. The French did not want a war over Alsace and Lorraine. They had prospered for forty years without the lost land. A simple return to the conditions of 1913 would suit them just fine. Germany had 65mm people; France fewer than 40mm. There are, of course, examples of a smaller country launching a sudden and decisive attack – Israel’s defeat of its neighbors in the Six-Day War comes to mind. But Israel launched that attack while simultaneously mobilizing its forces in a tiny country with interior lines; once Germany’s mobilization was announced, there was no chance of catching them unawares.
The conventional rule of thumb at the time of WWI was that an attacker needed three-to-one superiority in a given territory to take the territory without the advantage of surprise (as events would show, even that was lousy odds for infantry opposed by fortified machine guns). All France had to do was retreat and keep its armies between wherever the German army went and Paris; Germany could not possibly put enough men in the field. Keep the volatility down and run out the clock.
By committing its own men to an attack, France managed to get a good chunk of them killed and pull the rest of them dramatically out of position. It was a needless increase in volatility: either they would miraculously break the German advance and grab Alsace/Lorraine in the process, or they would get blown out. Sure enough, the latter took place. France could not bring enough people to bear on the advancing German Army, and was faced with the German Army on the move in open country where the French could not establish a defensive position in advance.
By September 4 – barely a month after combat had begun – the German Army was within thirty miles of Paris and presumably contemplating the triumph awaiting them on the Champs Elysee. The French government had left town, and the military governor of town, General Gallieni, convinced the overall French commander, General Joffre, to counterattack with everything they had. Even six thousand reservists sent up from Paris by taxi:
This was not a winning battle idea. The Germans were on the march. The odds were that there were too few Frenchman in too hasty a position. Joffre’s plan was to let them get much further and then try to defend based on some natural boundary; essentially the approach the Russians took to Napoleon’s invasion.
Gallieni, however, realized that the war was thirty miles from ending. Once isolated, Paris could not be defended. Once Paris fell, France would surrender, whatever the brave words from the government in Bordeaux. So it was now or never, and even a lousy battle strategy was better than no battle strategy at all.
As it happened, the French won the battle at enormous cost – nearly a quarter million casualties. The Germans retreated and dug trenches, and the German commander, Moltke (after supposedly having a nervous breakdown), called the Kaiser to tell him the war was lost. The Kaiser, of course, could believe no such thing with his army encamped on enemy soil two days’ march from its capital, but Moltke was right: once dug in and finally facing the Germans, the French Army could not be moved. What made no sense at the beginning of the war – counterattacking – had been necessary a month later.
Let me try to bring this back to something a bit tangible to today’s world. Krugman argues:
One argument I don’t buy, however, is that we should try to shrink financial institutions down to the point where nobody is too big to fail. Basically, it’s just not possible.
The point is that finance is deeply interconnected, so that even a moderately large player can take down the system if it implodes. Remember, it was Lehman — not Citi or B of A — that brought the world to the brink.
And as far as I know, there never was a time when policymakers could have viewed the collapse of a major money center bank with equanimity.
They certainly were worried about systemic risk in 1982, when I had something of a front-row seat. There were fears that the Latin debt crisis would take down one or more money center banks — Citi, or Chase, say. And policy was shaped in part by the desire to make sure that didn’t happen.
No one is saying a failure would be a source of indifference. But the difference between the previous crises and the current one – and certainly the next one – is that the previous ones were well within the capacity of the government to absorb. At some point we are dealing with crises that become, to use Buiter’s phrase, not solvency but sovereignty crises.
Suppose AIG had failed. It would have torn through the finance establishment – Goldman Sachs would have failed, Morgan Stanley would have failed, some number of European banks would have failed. Pension funds and insurance companies would have been in crisis. The Chinese government would have been furious. But strangely enough, the problem would have been contained; the US government would have retained its freedom to act. The state would be literally trillions of dollars richer. It would retain the ability to restructure the pension system directly, for example. By giving time and space to the problem and using the private investment in the finance industry as a first loss position, the country would have fallen back in an organized way, always with its reserves ready to go.
Instead, we are engaged in a manic version of a full court press. The Fed is buying anything and everything; if it finds a market trading away from it, be it mortgages or corporates or frozen concentrated orange juice, it dives in lest spreads spook the market. If a company begins to bleed capital, the Treasury jumps in. If the market begins to drop, we get every government official and business leader on camera and talk it up.
All of these activities cost money and credibility, and as Thomas Jefferson supposedly said about a very different topic, it’s a bit like holding a wolf by the ears: it can’t go on forever but you don’t dare let go. The crazy thing, is, we don’t need to do any of it, we just think we do. We could take a very different perspective and state clearly that we are not going to bail out any private company. We are going to play our game, use the time we have and the resources we have to recognize that we have the lead and just need to cut down on ultimate variance. The alternative is a sucker’s bet where heads we get the green shoots and everyone forgets the whole thing, tails we have Weimar-style hyperinflation. Why run the risk when we prudently avoided getting into the fight for so many years?
I may have been a day ahead of myself – check out this post (especially the attached slides) from Simon Johnson at Baseline. It should be no surprise that pouring 40% of GDP into stimulus for the financial sector has hidden the sins of the financial sector, at least for now. But the problem is that every dollar we pumped into the various bailouts went to satisfy a historic obligation, not to produce anything new. To a good approximation, the taxpayer replaced the long-term creditors of the banking system, just on atrocious terms. Furthermore, the limited oversight and blithe acceptance of fraud and profiteering have dulled any outrage or objection to bailouts elsewhere in the economy, be they the autos or, at some point, the more profligate states. We are running a massive deficit with the serene confidence that we are merely making up for dwindling private appetite, and soon we can stop.
How are we ever to get off the wild ride? If you pull your goalie in the first period, you are virtually certain to enter the third period needing six skaters to compete. If it is too difficult to let a bank fail today, how will it be easier when the bank is bigger (consolidation) and we are poorer (having shot our bolt)?