By Richard Wilson, Vice President, Product Strategy, Harte-Hanks Trillium Software
Arbitrage is one of those concepts that seem incredibly complex and arcane until you see it in action. It was originally a practice that gained currency (literally) before the advent of internet-speed information exchanges. In an earlier time, the trading price of commodities could vary slightly in different markets. If you knew the price difference, it was possible to simultaneously buy and sell something and realize immediate gain. This concept can be applied to financial markets or even more recreational endeavors.
Spring is around the corner, and for those of you who equate that with the start of baseball season, you may also know that the concept of arbitrage was used in a fantastic baseball book by Michael Lewis titled Moneyball. In it, he explained how the principles of arbitrage were applied by the small-market Oakland Athletics professional baseball team to achieve a completely different goal – winning baseball games.
If you haven’t read the book, it highlights how Billy Beane, the team’s general manager, implemented a series of key metrics that could be applied to the player performance statistics captured throughout the major and minor league baseball system to find undervalued talent. Statistics are everywhere in baseball, but the idea that you could develop statistical metrics to spot and exploit something as seemingly arbitrary as performance on a baseball diamond to win major league baseball games was a stroke of genius. It enabled the Oakland A’s to consistently outperform teams in its division and across the major leagues every year.
One of the great pleasures of my work is that it gives me the opportunity to travel and meet the kind of people who have the same level of insight and intelligence as Billy Beane. Only for them, the challenge is to develop metrics that spot misalignments in financial and customer data that can be exploited to improve operational performance.
The same problem exists with data management as in baseball…statistics are everywhere, but you have to be creative and brilliant to develop the metrics that will bring out benefits and minimize risks, resulting in measurable ‘wins.’
That’s really what is happening in some of the leading financial services firms I’ve talked with. Creative minds have begun to spot where data gaps and inaccuracies incur punitive risk reserves. They are finding ways to spot and resolve these gaps, enabling their organization to free up badly needed investment capital that can be pumped back into the investment economy.
These days, no available resource is more important than a firm’s maximum investment capital. It’s the equivalent of adding a number one starter to your pitching rotation or a potent number four hitter in the lineup.
I am going to enjoy watching this ‘season’ unfold.
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