Hot Stove Myths

Let me debunk a few common myths about baseball’s labor market as baseball’s second season begins.

GMs can buy low and sell high — So, let me get this straight: you think you know when a player is playing above or below his true ability—usually due to a small sample or by using a SGT-approved metric instead of a mainstream statistic—but guys who make a living in baseball completely miss it. For this to work, the GM on the other team has to be a colossal moron. GMs have made mistakes in the past and will make mistakes again, but they’re not dumb enough to act on a meaningless hot/cold streak. You can’t sell high or buy low and profit financially because all GMs understand these things. You don’t have to wait for a guy to get hot to sell him, nor dump him before he gets cold. In addition, the key knowledge of when the peak or trough is doesn’t exist, except in the mind of message board posters. Fluctuations in performance create uncertainty, which affect the price that GMs are willing to pay.

The number of free agents at a position affects the price of free agents at a position — It seems logical that more free agents at a position will mean more options for teams. Players act as substitutes and thus a team can pit the players against one another to keep salaries down. The problem with this is that the free agents have come from somewhere. A high number of players looking for new teams means that there is a corresponding number of openings that teams need to fill. For example, it there are four good shortstops on the market this means that there are also four openings on team. The increased supply of players is canceled out by the increased demand by teams needing replacements.

Every trade has a winner and a loser
— Swapping resources only takes place if both parties are made better off. Therefore, when we observe trades taking place, it’s likely that both parties are doing so because they expect to improve their teams (see the weak axiom of revealed preference, or as I call it: “the useful WARP“). Mistakes happen, but as a general rule, all parties to trades are winners. Who says economists aren’t touchy-feely?

Players peak at 27 and old players are worthlessPlayers peak at 29 — 30. And just because a guy is past his peak doesn’t mean he’s not valuable. The aging process is gradual, more like the Minneapolis Metrodome than an Egyptian pyramid. If a guy was good last year, even if he’s in his mid-30s, he’ll probably be good next year. Now, the older he gets the more dangerous long-run contracts get, but one- and two-year deals are fine.

26 Responses “Hot Stove Myths”

  1. Josh says:

    Great post.

    However, as a Giants fan, I usually feel that Sabean *is* the colossal moron who will buy a player who is simply on a single season tear or has a high BA but no supporting stats.

    Thus, I hope for lack of trades.

  2. Ken Houghton says:

    Your faith in GMs is like the Efficient Markets Hypothesis: dependent on symmetric information and analysis, and subject to short-term variance.

    Although in the case of a Drayton Moore or Jim Bowden, the phrase “short-term” is dependent on a duration longer than most baseball careers.

    Connie Mack, iirc, managed to survive as manager for fifty years for a very simple reason: he also owned the team.

    Similarly, there must have been some justification for all those one-sided trades between the Yankees and the KC A’s in the 30s and 40s.

    It’s true that it is easier to notice problems with GMs/playeer valuation now. But the free market in baseball works the same way as the more general financial one: sometimes, in mysterious ways and with other root causes than apparent rationality.

  3. JC says:

    I don’t believe the baseball labor market is purely efficient—in fact, I’m writing a paper at this moment that argues that it’s not—but the depth of stupidity required for GMs to profit from a buy-low/sell-high strategy is too much to square with reality. Bad decisions happen and there have been some incompetent GMs; but, the widespread claims of idiot-GMs across the Internet are not justified.

  4. DAP says:

    “A high number of players looking for new teams means that there is a corresponding number of openings that teams need to fill. For example, it there are four good shortstops on the market this means that there are also four openings on team.”

    this is not always true. often teams have a rookie or a guy they have been grooming to take over the position.

  5. JC says:

    It doesn’t have to do with the number of free agents, but the total size of the labor pool. This affects market prices regardless of the number of free agents. If there is one free agent and everyone has replacements, then he doesn’t have more bargaining power with a market of 5 free agents when teams have no replacements.

  6. JC says:

    Or let me put it another way. We could view the free agent market from the other side.

    “Wow, there are a lot of teams looking for shortstops this year, so the free agents on the market are going to get big bucks wit all these teams competing for their services.”

  7. Bill Nemic says:

    Your second “myth” is not quite accurate. To use your example, if there are four free agent shortstops on the market that does NOT mean that there are four shortstop opening on the market unless those shortstops can only be replaced by free agents. That assumption ignores the fact that players can be replaced through the farm system. Consequently, in practice the number of free agents at a position can affect the price of free agents at a particular position as more free agents at a position than the number of openings will mean that players act as substitutes and thus a team can pit the players against one another to keep salaries down.

  8. bobrittner says:

    I think your first statement is exactly right and am always amused by posts that imply GMs are too stupid to recognize the problem with using small sample sizes.

    But isn’t your second “myth” somewhat misleading? For example, suppose there are 4 free agent SSs. Isn’t it possible that at least one or two became free agents because their team promoted a hot prospect? If so, there are not necessarily 4 openings.

    And also, both the quality of the free agents and the status of the teams needing SSs should affect the bidding. For example, if Jeter, Hanley, Bartlett and Rollins are free agents the bidding will be different than if Hanley, Lugo, Betancourt and Crosby are available.

    Similarly, it makes a difference if the Yankees and Boston are interested instead of TB and Florida. If there are 4 shortstops available, but one is Bartlett and TB is happy to start Brignac, and if neither NY nor Boston is in the bidding, chances are the market will be weaker for those four than if Hanley is the only top SS out there and both NY and Boston want him.

  9. “o, let me get this straight: you think you know when a player is playing above or below his true ability—usually due to a small sample or by using a SGT-approved metric instead of a mainstream statistic—but guys who make a living in baseball completely miss it.”

    OK, explain Aaron Miles’s contract with the Cubs. Explain the Eric Bedard trade. Explain the Andrian Beltre contract etc etc. It’s not just anecdotal evidence, there is real evidence of single seasons increasing a player’s market value beyond reasonable explanation – hundreds of data points over the last 30 years. Likewise there is almost no evidence of the reverses – a in his prime player having a great season and then getting a contract or involved in a trade where the body of his career are used to set his value.

  10. Jeff says:

    The first two points are completely false. Every year GM’s overpay for a free agent based on one good year. Gary Matthews is a perfect example. In 2006 he had career highs in almost every offensive category and has not duplicated since. The Angels gave him 5 years $50 million for a career fourth outfielder.

    The second point has already been squashed on here. Most teams have a prospect they have been grooming for a certain position.

  11. joe mayo says:

    There’s no right or wrong answers here. What’s often neglected is the influence of the fan base and media. GM’s of big market clubs are expected to chase the most expensive free agents every offseason, especially when their team is coming off a disappointing season. This results in many of the bad contracts seen today (Soriano, Bradley, Matthews, etc.) Also consider that many teams fail at acquiring their top target(s) and are left with a dilemma. Should I say “No Thanks” and choose to go with internal options and the resulting backlash from the fans. Or should I roll the dice on a guy coming off a big year in hopes he’ll be the missing piece to the puzzle. Keep in mind, it’s much easier to be a GM for a small market club, you have no choice but to develop your own players since the team likely won’t retain your best players once they hit free agency.

  12. MarkInDallas says:

    The #2 myth is correct. He is right to say the value of number of free agents is canceled by the spots vacated.

    What you guys are saying is the value of free agents is really affected by the amount of talent at that position that has either just arrived from the minors, blossomed over that previous year, or is available in the Rule 5 draft. That is true. That is really what drives the price of free agents.

  13. J.P. says:

    I think that J.C. missed a very important fact with Myth #2: sometimes teams have TWO (or more) talented players at a given position, and therefore if they let one player go via free agency or trade one away (the more likely scenario), there isn’t a corresponding “hole” to fill. The Milwaukee Brewers proved that this week. They had both J.J. Hardy and Alcides Escobar as shortstops. They decided to keep Escobar as the starting SS and trade Hardy to Minnesota. Orlando Cabrera will now be playing elsewhere in 2010.

    But the trade of Hardy did not create another shortstop opening in Milwaukee since Escobar was already there. So if you use supply/demand theory as the basis, then Cabrera’s value theoretically DECREASED because there is one less opening that he can fill.

    That being said, there are PLENTY of shortstop openings in baseball: Baltimore, Boston, Toronto, Detroit, Seattle (if Jack Wilson doesn’t return), Cincinnati, Houston, and Pittsburgh.

    The same theory can be applied in looking at the proposed trade of Chris Snyder from Arizona to Toronto. The D-Backs have decided to use Miguel Montero as the starting catcher moving forward, but they already have Chris Snyder under contract for 2 more seasons. Toronto had Rod Barajas as their starter this past season, but he’s now a free agent. If the Jays and D-Backs complete this trade, then both will have filled their starting catcher spot without creating another opening.

  14. toad says:

    I don’t think it’s easy to say much about the free agent market in isolation.

    The number of free agents is not independent of the overall market. A player who sees lots of good up-and-coming players at his position is more likely to seek an extension or exercise a player option than one who sees a scarcity of replacements. Similarly, the GM who sees replacements is going to bargain harder on extensions.

    These decisions will also be influenced by who the buyers are. If the Yankees or another big-budget team have a weak spot to fill, the pressure will be the other way.

    Finally, the number of FA’s at position doesn’t tell us all that much. Just because two guys play the same position, they are not necessarily interchangeable. A good fit for one team may not be attractive to another. In other words, the market is very thin, so you have to look at individual participants to draw conclusions.

  15. Carmelo says:

    How can you say that when there are 4 free agent short-stops that there are 4 teams that need a short-stop. That is negating the possibility that the team with a free-agent has an up and coming shortstop.

  16. Carmelo says:

    ok…I am glad I wasn’t the ONLY one to notice the falacy of the second point.

  17. JC says:

    You also are not the only person to ignore my response.

  18. Zach says:

    And you have yet to address your statement:

    “For example, if there are four good shortstops on the market this means that there are also four openings on teams”

    Your response ignored that fact that this is incorrect.

  19. “If that’s one of my worst mistakes — to sign somebody who has 20 home runs and 97 RBIs — I’ll take it,”

    -Dayton Moore, on Jose Guillen

  20. Alex says:

    “Wow, there are a lot of teams looking for shortstops this year, so the free agents on the market are going to get big bucks wit all these teams competing for their services.”

    Except once again, if there are 4 free agent starting shortstops, but two of the teams fill their holes with the Alcides Escobars of the world (so only two starting jobs needed), those 4 free agent shortstops have less bargaining power than if there were 4 openings.

    And Theo Epstein basically just justified the Hermida trade with saying he was buying low. It’s a result of having differing subjective opinions i.e. the Sawx think Hermida is better than the Marlins do, but it’s still Theo thinking he is buying Hermida at the low point in his career.

  21. Ben says:

    Just wanted to add that while the buy low/sell high concept may not exist in theory, I would argues that it happens quite often actually in baseball. I think back specifically to last year when the Yankees bought very low on Nick Swisher and made out like bandits this year because of it. Just compare the prospects that the A’s got for Swisher followed by the prospects that the White Sox got for Swisher just a year later and then try and tell me that buying low does not exist in baseball.

  22. Eric M. Van says:

    Well, I was one of those message board posters in alleged possession of knowledge that many GMs lacked, until John Henry hired me to have just that for the Red Sox. So let me rewrite your myths 1 and 2 from the POV of a practicing baseball ops consultant.

    *GMs can sell high or buy low on players based simply on their recent offensive performance as measured by overall statistics.* In fact, regression analysis of FA contracts shows that contract AAV is weighted very much like plain-vanilla projection systems (e.g., last three seasons 3-2-1). So every GM has an innate sense of how a player projects based on his last few seasons, _all things being equal_. In order to successfully sell high or buy low on player offense, GMs need to go deeper into the numbers in order to determine which players might over- or under-perform their projections. Note that is possible to buy low on a player coming off a great season (e.g., Adrian Gonzalez this year) or sell high on a player after a collapse, if you have reason to believe he will regress _less_ to the mean than usual. You don’t have to be a “colossal moron” as a GM to have a poor sense of which players are due for unusually strong or weak course corrections, you just have to be one of the sizable minority that does no in-house detailed analysis. Numerous internet savants correctly pegged Nick Swisher as a good candidate to bounce back more completely than usual from his off year.

    It is also possible to buy low and sell high because GMs as a whole do not accurately value an aspect of performance other than offense. As recently as four years ago defense was _absolutely free_ on the FA agent market (i.e., adding UZR or Fielding Bible Plus / Minus to a regression model with VORP and age added nothing at all), and it is almost certainly true that it is still undervalued. Baserunning is probably still pretty much free. Chone Figgins projects to have about $12M of hitting value next year, about $5.5M of defense, and about $2.5M just going from first to third on singles and scoring from first on doubles (at which he is the game’s best player). But he is not going to get $20M a year.

    *The number of free agents at a position affects the price of free agents at a position*. This is wrong on many levels. Even if free agency were the only source of new talent, it would still be wrong, because supply would always equal demand. In fact, the supply vs. demand situation for any position during the off-season is enormously complex and highly volatile. There will be teams with two above-average players, usually one veteran and one rookie (e.g., when the Phillies had Jim Thome and Ryan Howard), teams with two starting-quality players — one above-average and one below whom they could keep as an exceptionally good reserve, teams whose starter is merely below average but consistent, teams whose best candidate has upside to be above average but projects to be below, and teams with nothing credible. Every GM makes his decision to move or acquire a player based on their own situation and the market. All it takes to turn a seller’s market into a buyer’s market or vice versa is two GMs changing their minds as to whether or not they want to make a change at their position. And every GM is making that decision based on their estimation of what they think everyone else will do. Some may even be spinning their situation in order to influence the market, e.g., Kenny Williams of the White Sox announcing that the newly acquired Mark Teahen will be his starting 3B when he is almost certainly a fallback plan against the failure to sign Figgins, Adrian Beltre, Troy Glaus, or trade for someone better. The only rule of thumb is that the market at any position is unlikely to play out as expected — witness last year, when none of the young catchers on the trading block (Saltalamacchia / Teagarden / Ramirez, Montero) were moved despite catcher being a position in demand. Very few people foresaw the collapse of the market for good-hitting, weak-fielding OFers.

  23. Rodney King says:

    Just wanted to say thanks to Eric M. Van, because if he hadn’t made the post detailing the MANY fallacies in JC’s arguments, I would have spent even more time being mad at how terribly wrong this post is and how it ignores both market facts and general sabermetric studies. I know you think that since you’re an economist with a Ph.D you are above the sort of discourse on Fangraphs and Book Blog honing their statistical projections and analysis skills, but obviously you are not scientifically looking at your assumptions and models and comparing them to reality. Because time and again, they just do not hold up.


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