Valuing the Context
During the baseball off-season, few, if any aspects of the game are as interesting as where free agents end up. Each signing catalyzes a frenzy of analytical activity as writers from all walks of baseball life attempt to deduce whether or not certain moves made sense or were executed under poor judgment. On occasion, deals can be deemed poor before money even enters the picture, due primarily to the player being below average outside of some shiny stat like home runs or RBIs. On the other hand, there are always plenty of deals that make sense, statistically, but the money does not add up.
For the last month or so, Dave and I have used statistical analysis as well as economic concepts to determine the fair market value for several players. Essentially, we have been working to determine what a player is worth, relative to a replacement level player, while factoring in the going rate of dollars per win, inflation, and a potential discount rate for multi-year deals. There is no better way to evaluate a contract from a context-neutral standpoint then to combine offense and defense and determine wins above replacement.
Unfortunately, as Rob Neyer pointed out in a post yesterday revolving around my article on Gil Meche’s worth, baseball does not exist inside of a vacuum, and context is very real. Rob’s point, with which I firmly agree, is that even though Meche has statistically been worth over the average annual value of his current contract, the deal is still poor when the context of the Kansas City Royals is taken into account. As in, is that $11 mil/yr really worth increasing the win total from 71 to 73?
This idea of context is extremely important, because the price of increasing from 71 to 73 wins is vastly different than an improvement of two wins from 91 to 93. The difference, realistically, involves the playoffs. That 93-win team may now play into October whereas, with 91 wins, they would have fallen just short. Therefore, it would make more sense for teams in this situation to pay a higher fee per win than the 71-73 win team. Perhaps they value wins at a rate of $7-7.5 mil as opposed to $4.8-5 mil. Along similar lines, the team with the win total in the 70s may be inclined so as to value players at a rate of $3-3.5 mil/win. With regards to Meche, Rob’s point boiled down to the fact that even though Meche is worth about $12.4 mil right now, he is not worth that much to the Royals, with their payroll and attendance struggles, as well as their inability to make the playoffs, or even the .500 mark.
Our analyses here generally tend not to discuss context, as we merely look at the fair market value of a player, regardless of where he signs, perhaps to serve as a benchmark. If Meche were a free agent right now, he would be worth 12.5-13.8 mil, depending on whether or not he signed a one- or multi-year deal. If he were a free agent today, worth a projected 2.75 wins above replacement, it would make sense for a team on the cusp of making the playoffs to “overpay” his worth to increase their chances. It would not make sense, however, for a team like the Royals to do the same, given that they would still struggle to even reach the .500 mark.
In an e-mail conversation with Neyer, we arrived at the same conclusion: the issue of an opportunity cost is what this really boils down to; that is, what would happen if the $55 million given to Gil were instead invested into international talent, the amateur draft, or scouting? In that scenario, how many potential wins could be added to the major league team in the five years of Meche’s tenure, or even the year after? For all we know, those investments could have resulted in five players capable of sniffing the +1.5-2.5 win mark. And would the attendance or TV ratings from the past two years be any worse without Meche?
I like Meche, and statistically, he is worth more than the average annual value in his current contract, but I wanted to make it clear that context needs to be included when evaluating a deal in order to be as accurate as possible. It is different determining if an actual signing makes sense compared to simply determining the fair market value. For instance, if we wanted to see if Ryan Dempster was worth his deal, or how much his worth exceeded the value, a similar analysis would need to be run, and the context of the Chicago Cubs would also need to be taken into account. If the goal involved merely determining his fair market value, prior to signing, context is not necessarily as important.
The problem we run into, though, is that even though all dollars/win are not created equally, it is particularly tough to determine the true rates. Are 85-win teams justified in spending $7 mil/win? Are 90-win teams justified in spending $9 mil/win? Are 65-win teams justified in spending anything over $3 mil/win on a single player, given their likely low payroll and the fact that one player would not turn the team around? What are your thoughts on the matter? At what win threshold does it make sense to exceed the general going rate or fall short? Should teams with little shot at contending for several seasons even attempt big deals?