The Last Dance: An Ode To Jerry Krause & How Sir Charles Barkley Is Wrong About Analytics

The Last Dance

In the Last Dance, we see John Paxson hit a 3-pointer in the face of sports analytics hating Charles Barkley to win the 93’ NBA championship. In addition, the saga involves classic emotional concepts such as love, winning, hate, rivalry, happiness, sadness and most of all camaraderie among teammates. Personally, the Last Dance makes me reminisce about tough battles on the hard court with my teammates, but also about politics when it came to playing time and preferential player treatment. The documentary provides a full backstory to Michael’s competitiveness, Scottie’s sacrifice and Dennis’ surprising basketball intelligence. However, the most fascinating story line was going behind the scenes and into the to the locker room. I find the tension between the General Manager (GM) Jerry Krause, the coach Phil Jackson and Michael Jordan the most interesting part of the story as the trio had a dynamic up and mostly down personal relationship, while at the same time creating the most dominant basketball team in history. This might be an unpopular opinion, but neither Krause nor Michael would have won without the other and Phil had to balance their demands. Krause always said that organizations win championships, which obviously pissed off Michael and the other players who rightly felt their talent is what makes the team special. As my fellow nerds would agree upon, the players are wrong and Krause speaks truth about organizations because the most important ingredient to win championships is resource allocation. The role of a GM is similar to that of a Chief Investment Officer (CIO) running a large investment institution. Just like there is an opportunity cost for the CIO when allocating to either Apple or Microsoft, the GM has to make balanced decisions about salaries and player acquisitions. If Krause is the basketball equivalent to a CIO planning the strategic asset allocation for a large institution then Michael was absolutely the allocations central asset. This paper is a different take on the story about why Jordan’s Chicago Bulls was Moneyball before Moneyball, ultimately proving that the Round Mound of the Rebound is wrong about sports analytics and demonstrating how an optimal portfolio of players executing a systematic strategy wins championships.

1997-1998 aka the Last Dance Chicago Bulls Roster.

Asset Allocation

While the investment objective for a financial institution differs depending on if it is a bank, insurance company, endowment or pension fund, the objective of every NBA team is to win now unless sacrificing now means more winning in the future. One of the best stories in the Last Dance is when Jordan wills the 87’ Bulls team to the last playoff spot in the Eastern Conference, despite going against management’s tanking objective. Balancing winning now with winning in the future is one of the many reasons why Jordan and Krause butted heads. Their relationship is actually similar to that of a board and the CIO of a large institutional investor. If the CIO has responsibility of the investment portfolio of a large endowment fund, then obviously that CIO wants to earn profits both now and in the future, but the former is if higher importance to the CIO, as the compensation is based on the portfolio’s periodic performance. If the allocation is underperforming during a particular evaluation period, then the board of the endowment will question the CIO’s ability to deliver. One can say that the board, CIO and hedge fund/asset have misaligned incentives. To minimize misaligned incentives, the CIO sets a strategic asset allocation together with the board, which consists of target range allocations to different assets classes and strategies such as 10-20% Equity, 10-20% Fixed income and 20-30% Hedge funds. For an NBA team, the CIO’s investment objective is replaced by the team’s winning objective. To achieve the winning objective, a strategic winning allocation is negotiated between the players, coaches, GM and ownership. This winning objective outlines a game plan or system that the team will utilize to win games. For the 98’ Bulls team, the strategy was the triangle offense and the resources was the players chosen by the front office and coach to make the triangle deadly.

Above are three well-known resource allocation approaches utilized by CIO's in portfolio management. The winning objective for an NBA team is suitable with the Asset only approach, as the objective is to win, while remaining within the bounds of the resource constraints.

Winning Objective

Thanks to the visionary mind of long time assistant coach Tex Winter, the Chicago Bulls had the possibility of running a complex revolutionary yet executable strategy in the now historical triangle offense. Following successful agreement to adapt the triangle strategy, the goal of GM Krause was to find the optimal blend of assets to maximize the power of the triangle offense. His first move to achieve his objective, was to replace head coach Doug Collins with Phil Jackson. In the Last Dance, we find out that Phil’s approach to coaching is heavily influenced by Tex Winter. By hiring a new coach influenced by Tex, Krause found the perfect deputy CIO to handle the tactical asset allocation decisions for the triangle offense. If the strategic asset allocation is hiring the best players to execute a set strategy, then the tactical allocation decisions are made to optimally deviate from the strategic allocation during the game or season. For example, a tactical basketball decision is to put the basketball in Michael’s hand and clear out the floor when there is 20 seconds left of a tie game or perhaps pass the ball to Paxson for a long bomb game winner. This is also exactly why the strategic asset allocation agreed upon between a CIO and his institution is range bound rather than an absolute percentage target. If the CIO reviews economic data displaying a high likelihood of a future recession, while the strategic asset allocation outlines that the institutions should have 20-40% exposure to equities, then the CIO’s institution will most likely make a tactical decision to have the equity exposure at the lower end of the range. Hiring a deputy CIO in Phil was an important decision by Krause, but the biggest obstacle was getting Michael to buy into the triangle offense. Playing a more systematic offense meant that Michael would sacrifice having the ball in his hands. Convincing your best player to trust a system that may hurt his wallet shares similarities with the CIO of an endowment convincing the chairman of the board to make a unique investment. Both Michael and the chairman have egoistic reasons for their reluctance in trusting a system that has not previously been utilized, as it might hurt their wallets or deviates from what is considered normal by their respective industry standards. However, by working in symbiosis as coach and GM similar to a CIO and a deputy CIO, Phil and Krause successfully got the best asset in history to buy into Tex Winter’s revolutionary triangle system.

A simple four asset mix demonstrating how tactical allocations can deviate from the strategic target set by an investment institution. For the Chicago Bulls, Krause set the strategic target, while Phil controlled the deviation range. The tactical deviations for the Bulls were not fixed, but above is just an example.

The Triangle – From A System Comes Creativity

Old school Sir Charles Barkley aka the Round Mound Of The Rebound loves to scream out loud on TV that sports analytics is garbage. His opinion about informed decision making in basketball is similar to the science opinion of a flat earth believing church back in the 16th-century. That particular church almost put Galileo, one of the most famous GMs in scientific history, in jail for using the scientific version of sport analytics. Sir Charles is obviously wrong and that is why he like me never won an NBA championship. Precisely as scientific tools such as telescopes provide great astronomers with the ability to figure out the Cosmos, sports analytic tools enhances the ability of great basketball players to win games. For example, simple probability theory explains why the amazing Stephen Curry shoots 20 guarded 3-pointers a game, two meters behind the 3-pointline, and still wins championships. Sports analytics is also arguably the main reason why Chicago Bulls won in the 90s, as GM Krause understood the edge of feeding a systematic strategy with perfectly matched assets. Perhaps the optimal comparison for the triangle offense is the quant revolution in finance for 3 reasons.

Above depicts the triangle offense and what happens here is that the point guard, "circle 1", passes the ball to either the shooting guard right "2" or to small forward left "3". In both cases, the "1" cuts through to the corner and the ball tries to find its way either to the center right "5" or power forward left "4". By playing a motion as above the players become highly creative and can create high percentage Sharpe optimal shots.

Reason 1: Unleashed Creativity

Precisely as a quantitative investment strategy, the triangle strategy is built on a theory to systematically maximize asset output. To achieve the objective, a quant strategy follows a predetermined set of rules across a diversified set of asset classes, while the triangle follows a predetermined motion offense. The latter always start with a pass out to the wing that in turn looks for a pass to the post player on the block to open up the floor. By following this preset motion, the triangle narrows down the scoring options from an uncountable number to about 100 different ways to score. If you have ever been to an American grocery store, you will know that there is an infinite amount of serial brands to choose from and all those options inhibits your ability to choose, which in turn limits your creativity. When players practice the triangle offense they get really familiar with those 100 options and as teammates they develop a natural ability to generate staggered actions that maximizes the team’s ability to score points. A quantitative investment strategy uses the same philosophy, but rather than bounding the number of options, a quant strategy constrains the amount of exposure that the system can have to a single instrument or asset class. The quant just like the GM must therefore creatively design a system that is optimal given its risk management or resource constraints.

Above is a per game average per statistical category relative to other teams. In the 1998 season, there was 29 teams so if a team scored the least points that would give a rating of "1" and if a team scored the most points then that would give a rating of "29".

Offensive Rating Categories: 3P%, 2P%, FT%,TRB, AST, TOV, PTS

Defensive Rating Categories: 3P%, 2P%, FT%, TRB, AST, TOV, PTS, DRB, STL, BLK

Worth noting is that the Bulls played Indiana Pacers in the conference finals and Utah Jazz in the Championship.

Reason 2: Changed The Industry

The computer relying quants changed the game for the investment industry. The number of investors relying on gut feeling has drastically decreased, while investment managers deploying a scientific approach to investing has drastically increased. The finance comparison to the triangle offense is Jim Simon’s quantitative Hedge fund Renaissance Technologies. The performance of their flagship Medallion strategy has an annualized return of 39% after fees for over the past 30 years. That means if you allocated 1000$ to Medallion in 1990, that 1000 bucks would be worth almost 20 MUSD before taxes today. Similar to the performance of Medallion, the triangle offense won 11 championships spanning 20 years split between the 1990s Bulls and the 2000th Lakers team. In addition to total domination, the triangle offense also influenced a new era where sports analytics has guided decision making for teams currently dominating the NBA.

I wish I had the above chart for the 98' Chicago Bulls team presented in the Last Dance. Basically what above describes is that teams have a higher effective FG% early in the shot clock (Between 24-18 seconds left). Toronto won the 2019 NBA championship and should take a large percentage of shots early. However, Clippers and Rockets should perhaps slow down the pace as their effective FG% decreases as the shot clock ticks down. The Triangle should theoretically improve the effective FG% and perhaps someone should study this.

https://fansided.com/2020/04/27/nylon-calculus-basketball-optimal-stopping-problem/

Reason 3: Relative Value Of Assets Are More Important Than The Absolute Value

The golden rule of winning in basketball is replaced by achieving a high risk-adjusted return in investing (Sharpe ratio). Unlike a basketball system, a quant investment strategy depends on computers and can therefore handle almost an infinite amount of options, but to maximize return for a given unit of risk, it is important to not concentrate all risk exposure to one asset or instrument To reach a high Sharpe ratio without concentrating risk exposure, a quant firm must allocate resources efficiently. Even if a certain investible asset has a Sharpe ratio on a standalone basis, it might not make sense to have a high exposure to that asset from a holistic portfolio perspective. Preventing over allocation of the ball in basketball is important as well. The triangle limited Michael’s ability to score 50 points every game, which in turn increased the team’s ability to win. Successful investment and basketball systems demand diversification by accounting for the relationships between assets in the portfolio to achieve their respective objective. That is why the Chicago Bulls had a portfolio of players such as Scottie Pippen, Dennis Rodman, Steve Kerr, Tony Kukoc, Luke Longley and others, rather than 12 Michael’s.

Above chart demonstrates Rodman's paradox. As you can see, Rodman is by far the best rebounder in NBA history, as he constantly provided his teammates with tons of second shot opportunities. Chris Cole of Artemis Capital describes the Rodman Paradox as adding a nonconformist negative yielding asset into a portfolio of positives. By adding a negatively correlated asset there are hidden none-linnear benefits because he improves the efficiency of his teammates, which is similar to being long volatility in an institutional investment portfolio. In other words, when S&P 500 drops in value, you want to have the Rodman rebound in your investment portfolio.

Building A Portfolio Of Players

The most talented basketball players with the greatest athleticism such as LeBron James, Shaquille O’Neal or Michael Jordan are always is in high demand, but obviously both low in supply and very expensive. When Krause successfully drafted Michael Jordan and later Scottie Pippen, he knew that he got two generationally athletic talents on his team. He also knew that other top teams had similar talent levels and that Michael type of players would be successful on any team. For Krause to have Scottie and Michael is like for a CIO to have equities in his portfolio. Having equities in a portfolio is foundational and equities should therefore not be the main component when evaluating the performance of the CIO. The performance focus should instead be placed on the assets used to diversify the portfolio’s key equity exposure. Krause together with the Chicago Bulls front office therefore started building a diversified team that would suit the triangle offense. A key advantage with the triangle is that the offense allowed for off-the-ball-movement, which meant that weak areas of individual players were hidden within the flow of the offense. This resulted in generalist players being replaced by specialists. Expert 3-point shooters that were relatively un-athletic did not have to create their own shots and players such as Steve Kerr or John Paxson flourished. Despite lacking hand-eye coordination when compared to the typical NBA player, Dennis Rodman was able to focus on his rebounding as he could score within the offense just like Kerr or Paxson. The offense also made the typical ball dominant point guard unnecessary, which meant that the Bulls, without sacrifice, could acquire a Ron Harper who could share ball handling duties with Michael, while focusing on his defensive assignment. When Michael or Scottie needed a breather, Kraus drafted Toni Kukoc, the “Croatian Sensation”, to keep the offensive production alive. By creating a system that enhanced the strong parts of the player’s game, it was also much easier to allocate resources to find high value specialist bench players. This sports analytic insight that GM Krause had in the late 80s was way before his time and I would argue that it has influenced the four major American sports as we see them today. It is actually appropriate to compare the triangle offense to Henry Ford’s production line as specialization reduced the time of building a car from 12 hours to 2.5 hours. Krause was Billie Bean in Moneyball before Moneyball. Worth noting is that the beginning of the Bull’s domination took place before Michael Lewis was an accredited author.

GM Jerome Krause

Conclusion

After watching the Last Dance, the viewer gets a clear understanding why Charles Barkley never won a championship. This epic sports saga opened the door to the most legendary basketball team in history; the 1997-1998 Chicago Bulls. We got to see the full backstory to Rodman, Pippen and Jordan. We also got an inside view of the tense relationship between the GM Krause and the players. We saw that his CIO style of managing the players as financial assets was not always appreciated, but it delivered the resources needed to win consecutive championships. The key advantage for the Bulls was the triangle offense ability to allow players to hide weaknesses within their games. This allowed GM Krause, the front office, coach Phil and the players to agree upon a strategic asset allocation that was optimal for the team even if it meant Michael scoring less points. When the situation demanded the team to deviate from the triangle, coach Phil was the perfect tactical asset allocator. My conclusion is that GM Krause revolutionized the game by using principals of portfolio management to create the optimal organization resulting in six NBA champions.

The game winner in game 6 to win the 98' NBA championship by MJ.

Stay Adaptive!

/Adaptive Alph