Trust the Power Law

Maybe the 76ers’ success isn’t actually about The Process…

From the moment Sam Hinkie became General Manager of the 76ers, something was different.

Hired a month out of the 2013 NBA Draft, Hinkie made his first big wave when he traded the 76ers best player, Jrue Holiday, to the Pelicans for two first round picks. In 2013, that netted him the promising Nerlens Noel. The following year he selected Elfrid Payton and flipped him for two more first round picks.

While most general managers are under strict “win now” orders from ownership, Hinkie was not constrained by convention. He wielded “the longest lens in the room” to sacrifice present success for a future edge over the rest of the NBA.

As Yaron Weitzman wrote in Tanking to the Top:

“Hinkie believed his ability to wield the ‘longest lens in the room’–a favorite phrase of his–gave him an edge over his competition. He wasn’t worried about how many games he’d win the following season. By shooting for a target five, or seven, or even ten years down the road, he’d be free to operate in a way distinct from his competitors. While everyone else was fighting over the present, Hinkie would be alone cobbling together assets for the future and leveraging his lack of a timeline into an advantage.”

As of 2020, it seems to have worked out (but not without drama). The Sixers are one of the most exciting teams in the league. They’re among the best teams in the Eastern Conference and are expected to compete deep into the playoffs every year.

Since Hinkie took over, “Trust the Process” has been the rallying cry of the Philadelphia faithful. The Process is the catch-all phrase that codifies Hinkie’s “longest lens” philosophy.

But as we take a deeper look into The Process, we see something else. The Process was more than just a sacrifice of the present for a better future. Instead, it was a reliance on a secret law of the universe.

The Secret Law of the Universe

From the time we’re young, we’re taught that life exists on a normal distribution curve.

Take height, for example. The average height of an American male is 5’9”. Most people stand within a certain range grouped around 5’9”. A much smaller number of this group falls on either end of the curve being extremely short or extremely tall. This is what the distribution curve looks like:

Another example is a curved test in school. The teacher takes the average score and makes that a C. Then, the grading scale shifts. Most people will earn somewhere around a C. The few exceptionally good or bad scores will earn scores on the tail-ends of the curve: an A or F.

This thinking continues as we progress through life. Most of us have been encouraged to build a diversified investment portfolio. As a result, we protect ourselves from an uncertain future. While we won’t become Warren Buffett, we will benefit from compounding interest to retire comfortably. Our portfolio represents that of a normal distribution curve: a few investments are massive successes, a few are epic failures, and most of them do decent enough that we make out well in retirement.

Here’s both the good and bad thing about this diversification strategy: you’ll end up being right around average. Average can be good if you want security and certainty. But, if you want to excel, you’ll need to think differently.

Which leads us to the point of today’s essay: When it comes to success, normal distribution thinking doesn’t hold up. 

Most people think the world is governed by normal distribution curves, but the truth is that the power law matters more.

Peter Thiel makes this observation in Zero to One:

“In 1906, economist Vilfredo Pareto discovered what became the “Pareto principle,” or the 80-20 rule, when he noticed that 20% of the people owned 80% of the land in Italy–a phenomenon that he found just as natural as the fact that 20% of the peapods in his garden produced 80% of the peas. This extraordinarily stark pattern, in which a small few radically outstrip all rivals, surrounds us everywhere in the natural and social world. The most destructive earthquakes are many times more powerful than all smaller earthquakes combined. The biggest cities dwarf all mere towns put together. And monopoly businesses capture more value than millions of undifferentiated competitors.”

Pareto’s observation of the 80-20 rule is the power law in action. Like a normal distribution curve, the power law can also be plotted on a graph. It’s a visual representation of the fact that 20% of the subjects on the X axis often capture 80% of the results on the Y axis. It looks like this:

When a power law is present in business, a small number of companies (possibly just one) have an exceptionally large share of the market. For example, Google owns 92.06% of the global search engine market. Bing is #2 with 2.61% market share. That’s the power law.

And as Pareto pointed out, this pattern exists all over the world.

There’s no doubt that the power law matters–probably more than we think. But I think we need to go a little deeper. And to do that, we’re going to hear from Thiel once again as he shares a secret about venture capital investing.

Venture Capital Investing and the Power Law

According to Peter Thiel, even venture capital investors miss out on the power law. Most investors, according to Thiel, assume that the companies they choose to invest in will produce moderate returns. Say no more than 4x investment.  But Thiel says that is false. VC returns don’t follow a normal distribution. Instead, they follow a power law.

“The error lies in expecting that venture returns will be normally distributed: that is, bad companies will fail, mediocre ones will stay flat, and good ones will return 2x or even 4x. Assuming this bland pattern, investors assemble a diversified portfolio and hope that winners counterbalance losers. But this ‘spray and pray’ approach usually produces an entire portfolio of flops, with no hits at all. This is because venture returns don’t follow a normal distribution overall. Rather they follow a power law: a small handful of companies radically outperform all others. If you focus on diversification instead of single-minded pursuit of the very few companies that can become overwhelmingly valuable, you’ll miss those rare companies in the first place.”

Thiel points out that in a VC portfolio, one or two investments far outperform all the others. This contradicts what people expect.

As you see, in the real world, the #1 company in a portfolio produces outsized returns when compared to the rest. Compare this to what conventional investing wisdom would suggest about the returns in the blue and you’ll see a stark contrast in what people expect and what actually happens with all the stocks in a VC portfolio.

Because investment returns follow a power law, Thiel shares two rules of VC investing:

First, only invest in companies that have the potential to return the value of the entire fund. This is a scary rule, because it eliminates the vast majority of possible investments. (Even quite successful companies usually succeed on a more humble scale.) This leads to rule number two: because rule number one is so restrictive, there can’t be any other rules.

The reason for this is simple, but not obvious. Because returns follow a power law, you’re better off concentrating on a few businesses that have the potential to produce 10x the investment.

Once you see the power law in one place, it’s easier to spot it elsewhere. While Thiel points out the power laws of nature and business, they are everywhere.

As I’ve thought about this, I’ve realized that the Power Law isn’t just the law of VC investing, or earthquakes, or cities. It’s also the law of The Process.

The Power Law of NBA Success

Taking what we’ve just learned, let’s go back to the NBA.

When we think about the NBA (or any professional sports league), it’s easy to assume that success follows a normal distribution. There are a few REALLY bad teams, a large group of teams around average, and then another small group of elite teams.

In fact, when we graph this out by team wins in the 2018-19 season, that’s basically what we get.

As you can see, there is a large group of teams around the 38-45 win mark. This is “average” in the NBA. There are fewer teams at the extremes. The teams at the extremes are the Knicks with 17 wins and the Bucks with 60.

Conventional thinking would lead us to believe that the way to become better is to find things that shift you further towards the right of the curve.

But perhaps that’s not true.

That’s because regular season wins are not the deciding factor in NBA success. Remember the 2007 Dallas Mavericks? The #1 seed in the Western Conference that lost in six games to the #8 seed Golden State Warriors led by Baron Davis?

Perhaps NBA success is best measured by championships. And the secret here is that championships follow a power law.

The Power Law of NBA Success is governed by how many stars a roster has. Look back at the NBA champions for the last 30 years. There is not a single championship team in the last 3 decades that did not have at least one (usually 2 or more) bonafide studs on their roster.

As any NBA fan knows, it’s not easy to have a star-studded roster. Some teams go years without having a true star on their roster (Thinking of you, New York).

When Sam Hinkie took over the 76ers in 2013, that was the state of the team. Sure, Jrue Holiday led the team in scoring with 17.7 points per game the previous season, but he wasn’t the kind of player that was going to lead the team to a championship.

Hinkie chose to disassemble the roster in hopes of building through the draft. Yielding the longest lens in the league, Hinkie was able to make trades that accumulated draft picks and gave him a chance to find those stars he was after.

As you’ll soon see, The Process wasn’t without failure. But maybe it wasn’t really about The Process. Maybe it was actually about the power law.

Trust the Power Law

Since 2010, the Philadelphia 76ers have acquired 9 players through lottery picks.

In the order of their draft year, here’s a list of the 9 lottery pick acquisitions:

  • Evan Turner (2010)
  • Nerlens Noel (2013 – acquired via trade from the Pelicans)
  • Michael Carter-Williams (2013)
  • Joel Embiid (2014)
  • Dario Saric (2014 – acquired via trade with Orlando for Elfrid Payton)
  • Jahlil Okafor (2015)
  • Ben Simmons (2016)
  • Markelle Fultz (2017)
  • Zhaire Smith (2018 – acquired via trade with Phoenix for Mikal Bridges)

If you study this list for 7 seconds, you’ll notice something stark.

Of the 9 lottery picks in our set, only three remain with the team. Only two of them (Joel Embiid and Ben Simmons) have turned into the stars that every team with a lottery pick is looking for. Embiid and Simmons are by far the best players from this list.

In this case, player performance has taken on a power law. Embiid and Simmons have by far had the best career in the NBA. As a casual fan, I feel reasonably confident saying that the sum of their NBA contributions are greater than the contributions of the 6 other players combined.

Here’s what it looks like on a graph:

Note: Zhaire Smith is not included in some of the analyses because he’s only been in the league for one year. Hard to make a judgment on his performance.

The Power Law in Salary

But it’s not just performance where the power law shows up. We can also see it in salary among the lottery picks:

See the power curve?

You probably want to point out the fact that Evan Turner and Markelle Fultz rank ahead of Ben Simmons in salary. That is true for the 2019-20 season, but next year he is due to make $29,250,000 which puts him a mere $292,010 from matching Embiid’s 2020-21 salary.

Of the four players (Including Zhaire Smith) from this list that have a contract next year, the graph follows almost an exact power law curve.

The Power Law in Jersey Sales

Lastly, let’s take a look at jersey sales. In the most recent NBA jersey sale rankings shared on January 17, 2020, we see a power law distribution among these 76ers lottery picks. 

Only Joel Embiid (#9) and Ben Simmons (#11) rank in the top 15. There’s no data available to see, for example, how many people purchased a Michael Carter-Williams Orlando Magic jersey. But I would guess that number is pretty close to zero.

The Process or The Power Law?

The power law is draped all over The Process. They hit on two players who have produced outsized returns for the Sixers than all other draft selections.

As Yaron Weitzman shares in Tanking to the Top, 76ers’ former GM Sam Hinkie knew that NBA championships require at least two stars on the roster. He chose to go star hunting through the draft.

While there were certainly some missteps (Noel, Okafor, and Fultz), the roster now stands in a good position to win on the foundation of Embiid and Simmons. 

It’s very easy for you and I to accept the Sixers’ narrative that this thing worked out because they trusted the process. But perhaps that’s not the whole truth.

Having the longest lens–playing on a longer timeline than their competition–allowed the Sixers to escape the normal distribution curve. Instead of trying to become less average, Sam Hinkie diverged from the crowd and was able to take advantage of the power law.

Over nine years, the 76ers had 9 opportunities to take a big swing at a franchise-altering player. They missed more than they connected. But when they connected, they connected big.

And when you live in a power law world, that’s all that matters.


Thanks to Zack Jones and Derek Florko for helping to turn this article into something readable.