Late last year Michael Lewis, author of Moneyball, published The Undoing Project: A Friendship that Changed Our Minds, about the collaboration between Amos Tversky and Daniel Kahneman, whose work gave birth to behavioral economics. In the preface to The Undoing Project, Lewis explains how Moneyball lead to The Undoing Project:

The ways in which some baseball expert might misjudge baseball players – the ways in which any expert’s judgment might be warped by the expert’s own mind – had been described years ago by a pair of Israeli psychologists, Daniel Kahneman and Amos Tversky. My book wasn’t original. It was simply an illustration of ideas that had been floating around for decades and had yet to be fully appreciated by, among others, me.

Lewis cites Richard Thaler and Cass Sunstein’s 2003 review of Moneyball in The New Republic as what initially piqued his interest in Kahneman and Tversky’s work. Thaler, of course, won the Nobel Memorial Prize in Economics last year for his work in behavioral economics.

The thing is, though, the story that Moneyball illuminates the insights of behavioral economics regarding the persistence of systematic error and inefficiencies, doesn’t quite work. Moneyball is the story of how Billy Beane exploited systematic error and inefficiencies in the then-existing market for baseball players to turn a low-payroll baseball team into a team that competed with, and won against, teams with much heftier payrolls.

That’s not a story of systematic error; that’s a story of eliminating systematic error in a market. Billy Beane was essentially an arbitrager, taking advantage of new information to identify and exploit differentials in market evaluations of player values versus the values indicated by his.

Let me restate that: Beane wrung out systematic errors and inefficiencies in the players’ market by seeing he could exploit players undervalued by other teams. In taking advantage of what others missed, however, Beane exemplified the implications of the efficient markets hypothesis. Through his actions, he (and others) would reveal hitherto unknown information to the market, with prices subsequently adjusting to reflect the new information. This does not mean that every decision of Beane’s was correct. But his approach took advantage of information others neglected.

Neglecting useful information is behavioral economics. An entrepreneur profiting from information others ignore, is the way the market’s incentive structure is supposed to work.

Indeed, the subsequent fall of “Moneyball” as a winning strategy is consistent with a dynamic version of the efficient markets hypothesis. When one or a few individuals discover, or uncover, information relevant to a market, it can be exploited for extraordinary gains by the one or few knowledgeable individuals. As the new means of acquiring relevant information becomes dispersed in the market, or even as the information in the hands of the few becomes increasingly revealed to the market through the price mechanism, the extraordinary gains disperse as well. As with arbitragers in the financial markets, the big gains are gone, it’s merely a matter of picking up fractions of a penny here and there. This is not the failure of the efficient markets hypothesis, this is the very prediction of the efficient markets hypothesis.

The ability of the Red Sox, for example, early on to use the “Moneyball” approach successfully, then growing disenchanted with it as it ceased to generate outsized results, is simply the equilibrium outcome. When everyone has the same information, there are no inefficiencies to exploit. To be sure, variations in equilibrium outcomes still exist, but they result from true. Once the new information is built into market prices, there’s no more systematic advantage to the “Moneyball” approach. Teams once again rely on the expert, albeit idiosyncratic, judgments of trusted scouts to identify talent. (It’s not an either/or, however. It’s that one system can no longer dominate the other. So teams mix what they use.)

But why did it take so long for baseball to produce a Billy Beane? That is, a person who would exploit the systematic misperception and inefficiencies in the market for baseball players? In their review, Thaler and Sunstein argue,

Why do professional baseball executives, many of whom have spent their lives in the game, make so many colossal mistakes? They are paid well, and they are specialists. They have every incentive to evaluate talent correctly. So why do they blunder? In an intriguing passage, Lewis offers three clues. First, those who played the game seem to overgeneralize from personal experience: “People always thought their own experience was typical when it wasn’t.” Second, the professionals were unduly affected by how a player had performed most recently, even though recent performance is not always a good guide. Third, people were biased by what they saw, or thought they saw, with their own eyes. This is a real problem, because the human mind plays tricks, and because there is “a lot you couldn’t see when you watched a baseball game.”

Well, maybe. There are a couple of possibilities I’ll discuss below. First, though, it’s important to note what Thaler and Sunstein explain, and what they don’t explain. Thaler and Sunstein explain inefficiencies before Billy Beane. They do not explain the emergence of a Billy Beane, and they do not explain the effect of Billy Beane had in wringing out precisely those earlier inefficiencies they identify in the pre-Moneyball market.

While we can certainly ask why it took the baseball market so long to produce a Billy Beane. We can also turn the question back around and ask Thaler and Sunstein to explain why, in their account, would they expect a Beane ever to emerge at all?

Back to the question of the timing of the rise of Moneyball in baseball. There seem to be two factors. First, the acquisition and use of information is costly. Secondly, Moneyball arose just at the time technology made accessible the acquisition and use of hitherto inaccessible information.

First, learning, information acquisition and manipulation, and the search for information can be costly. In the case of Moneyball, it was the manipulation of information that was the pivotal issue. All the information existed in raw form. What changed, though, was the dramatic downward shift in the cost of manipulating the data that existed so that it could be used systematically. This was provided by Beane’s assistant, Paul DePosta and his computerized spreadsheet.

Beane’s entrepreneurial genius was to recognize the new possibilities, and to be the first to take advantage of those new possibilities on a systematic scale. And, to be sure, there is a part of the story that behavioral economics can continue to tell. To wit, explaining the resistance Beane received initially, and the resistance to the approach among other teams. But Billy Beane solved the problem of systematic misperception in the player’s market by seeing a use for information before others did. That’s not behavior economics, that’s the market solution to systematic misperception that entrepreneurs and markets provide.

Now, don’t get me wrong. I expect the above sounds like unalloyed cheer leading for the efficiency of markets and the rejection of behavioral economics in toto. I do neither. This story, however, the Moneyball story, illustrates what can happen when an imaginative entrepreneur sees what others do not. Beane saw the existence of systematic misperceptions in the market for baseball players, baseballs players being underpriced relative to their true potential, and exploited that misperception to the benefit, if temporarily (which also reflects the efficient work of the market), of himself, the otherwise underpriced players, and the fans of the Oakland As.