In business and life, winning, however you define it, is the name of the game. Teams with endless talent sometimes fail to ascend or meet even our most basic of expectations. Conversely, teams that seem to have the average gene built into their genetic code rise to greatness. As a fan of the underdog, I am both perplexed and fascinated by this paradigm.
Some might say that the underdog in any story has more fight and has nothing to lose. While this is likely true, this dynamic is not as critical to the outcome in a team situation because of the interplay of the team and its dynamics. This concept was explored in baseball statistics. The concept rose from the one team’s inability to compete for the best players due to limited financial capacity. Just like startups, the Oakland A’s had to do less with more. Still, the Oakland A’s wanted to ascend to greatness, knowing they were limited in resources. The concept coined as “sabermetrics” is all about weighted averages and applies to business and baseball alike. After all, professional baseball is producing high-performing teams no different from any enterprise.
To keep this article clean, a weighted average results from the multiplication of each component by a factor reflecting its importance.
This concept is applied to investing as well. Investors understand that simple averages don’t consider the difference in weight an individual component or attribute has on the overall performance of the collective. By taking this into account, you can determine the pooled asset value predictors while theoretically stabilizing risk. However, the principle of weighted averages is a great predictor of performance; what happens when a dynamic code is applied to this concept? Exponential Moving Average (EMA) refers to timepoints placed greater weight and significance on the most recent data points. What does this mean for businesses and professional sports organizations alike? Is it possible that the employees/players you have today might not be the best ones as a company grows and changes forms? Statistically, this is indeed true.
With each season, your business will grow, flex and change form. This is in part due to the inherent nature of fluidity, changing trends, and the need to stay relevant. Just like the example above about Exponential Moving averages, as new businesses and concepts enter the market and weight must be placed more heavily on current and future trends than the reliance on what once was…
There are many examples of the failure to take a measured approach to change trends and technologies. We all remember the “Blockbuster” saga of an American-based home movie and video game rental services provider. This larger-than-life provider of home movies that popularized affordable movie rentals faded out of existence as technology shifted the way that video consumption occurred. Similarly, we have seen others stay in the fabric of relevance by considering both a weighted and moving average approach. After all, Netflix started out selling DVDs!