Ken's post on neuromarketing got me thinking about the similarities between "Moneyball" (philosophy, not book) and market theories. As a former finance worker (risk management and hedging), I lived and died by Black-Scholes.

Implicit in the Black model is an understanding that the market is efficient - that is, all available information is priced into the security. Unfortunately, this isn't true. Instead, many have moved to the "semi-efficient" market theory, where all available known information is priced into the security. This leaves open the possibility that someone can have more or better information than another, making the price, for a time, inefficient and leaving possibilities open for expansive profits.

The same holds true for baseball. Pricing players is relatively easy when done relatively. This player is comparable to this other player who makes X. The market has corrected in price, so the comparisons don't always hold true and must be adjusted. This season, everyone expects Carlos Beltran to "set the market" at around $12-14m dollars. Since he's good, consistent, and young, let's assume his efficient price is at the top of the range. This doesn't preclude the Yankees from overpaying or that Beltran may like playing in Houston, giving a 'hometown discount.' It also gives a player a chance to undercut the efficient price by being the first to act.

Where semi-efficient market theory comes into Moneyball theory is that a team can know more than another. Perhaps a team is using statistical information more accurately, has better scouts, or knows something on the medical front. This appears to be the case for Andy Pettitte, where it's been whispered that the Yankees knew his elbow wouldn't hold up through the next three seasons. (No one's even suggested that they thought it would happen this quick, to be clear.)

These market inefficiencies can be exploited and, as shown in Moneyball, can be successfully used. Buying players in rehab, such as Ryan Dempster or Aaron Boone, seems to be the newest working strategy, but in theory at least, there are infinite numbers of inefficiencies, always moving and waiting to be exploited.

While I love seeing the medical aspects come into inefficiencies, I think a player-level volatility index is the next big thing. I just wish I had more math skills.