Sunday, November 20, 2011

Guest Post: The Winner's Curse

We welcome in a guest writer this Sunday with a thoughtful post on free agency. Until his recent decision to shut it down, Dan Hennesey headed up Baseballin' on a Budget, the SweetSpot Network's Oakland A's blog. Now, Dan himself is a free agent of sorts, and we're glad to be able to feature his work without committing to six years and $120 million. Check him out on Twitter or see his recent guest post for Athletics Nation.

Most Octobers, baseball fans of all sorts bury their noses in the game.  The nuts are at home every night (if not actually at a game), tweeting and texting about each game.  The casual fan makes more of an effort to catch games on television.  Everyone with even a passing curiosity ups their interest in the game in October.

Come November and continuing into the winter, there’s a void.  Some fans dive into the NBA, the NFL, or the NHL (I still feel like I have to mention it as a major sport), but baseball diehards have a lot of time on their hands.  For most of us, our primary focus moves to the next season’s rosters. There are trades, but we don’t usually know about them until they happen.  Most are unexpected.  However, we know who the free agents are well ahead of time, and speculation begins while the season is still being played.  We invest a lot of time thinking about free agents, where they might be headed, and what team should get who.

In high school I took micro- and macroeconomics as an elective.  Believe it or not, I was a nerd.  I had a terrific teacher who had me hooked from the start, and then I minored in Economics as an undergrad and continued taking classes in graduate school.  There’s a principle in auction theory called “The Winner’s Curse,” which is generally interpreted as follows.

·     If each bidder has properly assessed the value of the good, then the winner of the auction has almost assuredly overpaid to win the auction. By winning, the bidder has overestimated the good’s actual value.  This also assumes that the good the bidders are competing for has the same value to each of them.
·     With each additional bidder, both the amount and likelihood of overpayment increase.
·     Even if the good has different values to each bidder, the winner still likely paid more than he had to to win
Sorry for the economics lesson; there’s a point, I promise.  I was reading Keith Law’s excellent review of the top 50 free agents available this offseason, and as I moved farther down the list, I realized that most of these guys are stiffs.  For example, numbers 20 and 21 are Josh Willingham and David DeJesus, 2/3 of Oakland’s vaunted outfield last season.  Any team signing these guys will be overpaying them.  They are good players to have while they are under team control, but almost every team should have internal options that can come close to matching that production for a fraction of the cost.

On ESPN’s page with Law’s list, there are links to his Top 50 lists for the past five years.  I clicked on the 2006 list just to see who was a free agent that year.  Boy, is it brutal.

PlayerContract07 fWAR08091011Total
1Aramis RamirezRe-signed with Cubs; 5 years, $73 million5.
2Daisuke MatsuzakaRed Sox; 6 years, $52 million (103 total)
3Alfonso SorianoCubs; 8 years, $136 million7.
4Jason SchmidtDodgers; 3 years, $47 million0.00.0-0.1

5Roger ClemensDidn't sign until mid-2007

6Andy PettitteYankees; 1 year, $16 million4.5

7Carlos LeeAstros; 6 years, $100 million3.43.61.2-
8J.D. DrewRed Sox; 5 years, $70 million1.
9Julio LugoRed Sox; 4 years, $36 million0.60.8-0.1-0.4
10Jim EdmondsRe-signed with Cardinals; 2 years, $19 million0.80.6


Obviously, that's a brutal year for free agents.  I have no idea what I thought at the time, but I'm guessing "it's a good idea to give Julio Lugo 36 million dollars" wasn't on the list.  To be fair, most players have different values for each team.  Albert Pujols has less value to the Yankees than to the Cardinals because they have nowhere to put him and the upgrade isn't too significant.  A middle reliever has more value to a good team than a terrible team because of the marginal wins added.  Of course, the cost to the big-market teams of screwing up is also lower.  Look at some of those contracts the Red Sox gave out.  Including the posting fee for Dice-K, they paid $40 million dollars to those three guys alone.  There are about 20 teams that can't afford to make one of those mistakes, let alone three.   

This year's top 10 is (in order): Prince Fielder, Albert Pujols, Yu Darvish, Jose Reyes, Jimmy Rollins, Mark Buehrle, Aramis Ramirez, C.J. Wilson, Carlos Beltran, and David Ortiz.  Most of them will probably help their teams next year.  Most of the 2006 free agents did that.  Might even be worth what they are getting paid.  But when we look at that list in 2016, we'll laugh at at least half of the contracts.  General managers are becoming more savvy, but that doesn't mean they can't do stupid things.  The way to build is through young players and trades.  The less I hear my team's name associated with free agency, the happier I am.

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