Well, the season is over for Calgary Flames; so anything hockey-related should be a fair game here now.
I thought the article below titled
Pulling the Goalie: Hockey and Investment Implications could generate an entertaining and interesting discussion.
Preamble:
For those who do not know anything about hedge funds, just a very brief (and overly simplistic) background: a
hedge fund is a private investment vehicle that is intended to make rich people more rich. Hedge funds invest their wealthy clients money by trying to recognize market trends and betting for and against various securities. Some obvious examples: they actively buy both long stocks (that they think would go up) and short stocks (that they think will go down). They also buy and short a vast amounts of options on bonds, currency contracts, derivatives and other financial instruments on the same principle. Modern hedge funds are managed mostly by very high-end technical people using super-complicated mathematical models recognizing market rends and sending buy/sell signals etc. Even though there have been some spectacular hedge fund failures (LTCM etc.) and even though there are hundreds of copycat funds that do not do so well, the most successful hedge funds (e.g. Medallion, Tiger) have proven that they can consistently outperform the general market and make more money (in exchange for huge fees 20%+++).
Cliff Asness is one of today's most respected hedge fund directors. He had sent this letter in the link below to the investors in March.
Summary:
In drawing parallels between professional hockey and investment management, Asness and his team have analyzed the probabilities of success and failure in NHL arising from pulling a goalie when down 1, 2, 3, 4 and 5 goals. The results are quite stunning. I found the following conclusions to be the most striking:
1. All NHL coaches do not pull goalie when a goalie SHOULD be pulled for maximum probability of success.
2. All NHL coaches are groomed to prefer losing while making proven decisions than winning while making unproven decision.
If you do not care much about reading the math and stats stuff, jump to the Chart on Page 5.
Quote:
The crossover point comes at 5:40 remaining. So, at 5:50 you should not pull the goalie, but at 5:40 you should. A team that practices optimal goalie pulling gains an average of 0.02 more points per game. That is worth 1.76 points in an 82-game season, over a team that never pulls the goalie. In the 2015-16 season, 24 of the 30 NHL teams were closer than 1.76 points to either the team ahead of them in the standings or the team behind them, so this is a material difference in expected performance that comes without extra cost or work.
When down two goals, it pays to pull the goalie with 11:40 to go, less than halfway through the third period. If you score to make it one goal down, you replace your goalie until 5:40, as any earlier is too aggressive when only down by one. So, if you’re still down by one goal at 5:40, you pull again.
When down three goals, you should pull at 17:50, just over two minutes into the third period; down four goals you should pull with 35:50 remaining; and down five goals or more, you can pull at any time. These numbers may sound silly, but they make sense and matter. A team that is down five goals early in period (we might argue in this case the goalie isn’t doing any good anyway, but ignore that) still expects to collect 0.04 points on average, and can increase that 75% to 0.07 points by pulling the goalie immediately and keeping him out until the team pulls within four goals, and using the optimal rules thereafter. The intuition is the same as pulling near the end of the game. If you do nothing down five goals early your chance of winning is tiny and you have little to lose trying to climb back into the game (losing by six is not that much worse than losing by five). Though we would admit the assumptions and simplifications of our model are probably being pushed much harder for this losing-by-a-ton-early analysis.
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Quote:
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Two reasons have been advanced for this failure to act. First, coaches are not actually rewarded for winning. They are rewarded for being perceived as good coaches. Obviously, the two are closely related but not exactly the same thing. If a basketball coach gets his team to execute crisp offensive plays with few turnovers that lead to two point baskets on 50% of possessions, he is deemed an excellent coach. If his team still loses 100 – 102, well, his players just weren’t quite good enough. If the same coach encourages his team to run-and-gun threes, with lots of turnovers and misses, but scoring on 35% of possessions, he has clearly lost control of his team. If they win 105 – 102 it’s perceived as just luck as everyone knows three point shots are risky. Essentially winning ugly is undervalued versus losing elegantly; and losing ugly can be career suicide. Once again, the way you measure risk matters in making the optimal decision.
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Discussion:
On the second point, I find myself totally agreeing with the theory behind coaching to lose. It does make a lot of sense to me and I see many parallels to this same approach in both large private businesses and government organizations.
On the first point, I find it very hard to agree to the theory behind pulling goalies earlier. Remember, these are extremely intelligent people behind these calculations and there are no reasons to believe that their probability estimates are incorrect. After all, all of their calculations are not theoretical - they are based on the actual NHL production numbers - all of the numbers, in fact. I do think there is something shaky and missing though. It could be that the players would take more shots on empty net resulting in more goals. But they have not so far in the time they have...
Anyway, here is the
link. The letter is not very long. Enjoy!