PRODUCTION PROCESS IN THE NBA: A FORMULA FOR A SUCCESSFUL TEAM A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Jigmei Dorji May 2016 PRODUCTION PROCESS IN THE NBA: A FORMULA FOR A SUCCESSFUL TEAM Jigmei Dorji May 2016 Economics Abstract Achieving success in the National Basketball Association is not only a priceless and historic feat, but teams that have success in the playoffs and regular season also benefit from financial bonuses. This paper estimates a production function for professional basketball teams, and uses the results to determine significant areas of focus that are positively and negatively associated with regular season win percentage. A Cobb- Douglas production function and multi-variable Ordinary Least Squares regression models are applied to data collected from the 2010-11 through 2014-15 seasons in the National Basketball Association. The results are also applied to successful teams in the playoffs in order to determine how regular season results translate to the playoffs. The resulting estimates indicate that successful NBA teams over the last five seasons have focused on shooting efficiently, keeping opponent shooting percentages low, rebounding, forcing turnovers at a high rate, and building their teams through the draft. KEYWORDS: Correlation, Econometrics, Multicollinearity, Multiple Variable Model, Ordinary Least Squares, Regression, Cobb Douglas, Production Function, Production Measurement, Sports JEL CODES: C1, C3, D24, L83 ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS Jigmei Dorji Signature TABLE OF CONTENTS ABSTRACT INTRODUCTION……………………………………...…………………………………1 Financial Incentive………………………………………………………………...2 Area of Focus………………...……………………………………………………2 LITERATURE REVIEW………………………………………………………………....3 Cobb-Douglas Production Functions……………………………………………...6 Basketball Analytics………………………………………………………………7 THEORETICAL FRAMEWORK………………………………………………………...9 Graph 1: Output and Marginal Product of Input X………………………………10 DATA AND METHODOLOGY………………………………………………………...12 Recent Trends in Basketball Statistics…………………………………………...18 Methodology……………………………………………………………………..19 REGRESSION RESULTS AND ANALYSIS…………………………………………..20 Table 1: Net Rating Regression Results…………………………………………20 Graph 2: Net Rating vs. Winning Percentage……………………………………21 Table 2: Play Style Regression Results………………………………………….22 Table 2.1: Offensive Rating Regression Results………………………………...24 Table 2.1a: Field Goal Percentage vs. Assists…………………………………...28 Table 2.2: Defensive Rating Regression Results………………………………...29 Table 3: Fixed Team Effects Regression Results………………………………..30 Table 3.1: Summarization of Win Percentage by Conference…………………...31 Table 4: Play Style and Fixed Team Effects Regression Results………………..33 Table 4.1: Play Style and Fixed Team Effects Beta Coefficients………………..35 Table 4.2: Summarization of Inputs and Output…………………………………37 Table 4.3: Play Style and Fixed Team Effects VIFs……………………………..39 CONCLUSION…………………………………………………………………………..40 REFERENCES…………………………………………………………………………..45 Introduction Every year from October to June for 82 games (with more successful teams playing close to 100 including the playoffs), 30 teams fight for supremacy in the National Basketball Association (NBA). But, only one team can call themselves the champions of the league at the end of the season. Over the last five seasons, four different franchises have claimed the Larry O’Brien trophy – the Dallas Mavericks, the Miami Heat (twice), the San Antonio Spurs, and most recently, the Golden State Warriors. The current decade has been a relatively balanced few years when compared to historical trends. The NBA has only had ten different teams win a title since 1975, indicating that the league has been enjoying a spell of competitive balance in the last five seasons. Led by eventual Most Valuable Player (MVP) Stephen Curry, the 2014-15 Warriors were able to jump out to an early lead in the standings despite playing in an incredibly competitive Western Conference. Golden State finished the season with a league-leading record of 67 wins and 15 losses and defeated the Cleveland Cavaliers in the NBA Finals for their first championship since 1975. Although the supremacy that Golden State exhibited during the 2015 season is now indisputable, did the Warriors exhibit distinct types of advantages that allowed them to dominate over the rest of the NBA? What types of effects did the style of play have on the winning percentage of the team? How did the personnel affect the record of the team? Did the fixed effects that the franchise has implemented off the court have an impact on the record on the floor? 1 Financial Incentive Winning a championship is the unmistakable goal of any NBA franchise and the players involved. Not only is claiming the Larry O’Brien trophy and hanging up the title banner priceless and intangibly significant, but teams that have success in the playoffs benefit from monetary bonuses as well. After winning the 2014 title, the San Antonio Spurs were awarded over $2 million in bonuses from the NBA, not including the trophy and championship rings, while the runner-up Miami Heat were also awarded $1.5 million. The valuations of franchises also increase significantly after winning the championship. According to Forbes, recent NBA champions have gained an average of 30% in team value after raising the trophy. Teams also raise ticket prices significantly during their Finals run. In 2015, the average Finals ticket prices in Golden State ran over $1,200 while the average ticket prices in Cleveland were over $1,300. Compared to the regular season, when the Warriors charged an average ticket price of $327 and the Cavs charged an average price of $258, merely playing in the Finals has provided a tangible financial benefit. In addition, teams that make the playoffs are awarded nearly $200,000 as a bonus, while teams that reach the conference finals are awarded over $380,000. The team that finishes the regular season with the best record in the NBA and in each conference is also awarded well over $300,000 as a bonus. Area of Focus The length of this study focuses on the past five seasons in the NBA. In particular, I plan to observe the characteristics of teams since the 2010-2011 season and determine the inputs that have been significant in affecting regular season success in the past five 2 years of NBA basketball. Due to the makeup of the last four title-winning teams, I expect that accurate three-point shooting and assisted field goals, as well as defending three- pointers are indicators of successful team basketball in the NBA. These team characteristics are related to the style of play that teams consciously employ, but are also a result of the type of players that each team has available. As far as fixed team effects, I expect that teams that build through the draft and free agency will have positive relationships with winning percentage. I plan to use an extensive list of independent variables in the model, including variables measuring the output of the team, statistics measuring the style of play the team utilizes (such as percentage of total shots from three-point range), and additional variables measuring fixed team effects (such as average attendance and the conference of the team). After running several regressions and determining significant variables through the model, the models should be able to describe successful teams from the past five years through style of play as well as the areas of focus that the team exhibits through their statistics. After determining the significant inputs in the model, the results should also be able to predict characteristics of successful teams in the future. Literature Review The article “Who is ‘Most Valuable’? Measuring the Player’s Production of Wins in the National Basketball Association” by David Berri of Managerial and Decision Economics (Berri, 1999) focused on linking individual performance to team wins in the NBA. Berri found that although having the MVP certainly helps to produce wins, having multiple efficient and productive teammates – particularly in the Playoffs – was the key 3 factor in the 1997-1998 season. The model that Berri used to determine each player’s production of wins was: Production of wins = (PM + TF + TDF – PA + TA) * total mins (2.1) Berri first calculated each of the inputs individually, and then combined the factors into the equation above. His inputs were per-minute player production (PM), per-minute team tempo factor (TF), per-minute team defensive factor (TDF), average per-minute production at position (PA), and average player’s per-minute production (TA). The results that the model produced indicated that one dominant player per team is not enough to have success against Playoff competition. Fiona Carmichael, Dennis Thomas, and Robert Ward’s article “Team Performance: The Case of English Premiership Football” (Carmichael, Thomas, & Ward, 2000) utilized a linear production function where the individual match results were determined by various input variables. However, a slight variation in inputs that the authors used compared to the other cases used as background knowledge in this study was the difference in the types of independent variables. Team performance is still the variable utilized as output in this scenario, but statistics such as difference in shots on target, difference in percentage of all successful passes, difference