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Tuesday, August 8
That big deal can turn dangerous

By Keith Law
Special to ESPN.com

Editor's note: The team of writers from the Baseball Prospectus (tm) will be writing twice a week for ESPN.com. You can check out more of their work at their website at baseballprospectus.com.

Ken Griffey Jr., one of the best players in baseball and among its top gate attractions, is traded for a good but underwhelming package of talent. Randy Johnson, an impact player at a similar level, is traded for three good prospects, two of whom are now entrenched in one of baseball's best rotations.

Why such a difference? The Reds, Griffey's suitors this past offseason, didn't have to bid against anyone else, while the Astros, Johnson's suitors back in 1998, were bidding against half the teams in baseball. The history of bidding wars, both in baseball and in business, paints an unpretty picture for the "winners."

Twice a year, baseball whips itself into a frenzy by shuffling players around: at the trading deadline on July 31 and during the free-agent signing melee in December. The most-coveted players find multiple teams competing for their services, and a sort of auction develops in which the seller (the team holding the player, or the player and his agent) holds out for the highest bidder. If it's a trade, some reporter will declare the deal a Class One felony because he's never heard of any of the players in the deal beyond the marquee name.

But are teams just overpaying for talent? The history of deadline deals and massive free-agent contracts seems to indicate the latter. Willie Blair scored a huge free-agent contract after his 16-8 year in 1997 because of a perceived paucity of "quality" starting pitching that offseason. Andy Ashby fetched one of the top young pitchers in baseball in a trade earlier this month because he was seen as one of the few top starters available in trade. And Alex Rodriguez is headed for a windfall that will put his salary equal to the payroll of one or two teams -- a deal that will leave him hard-pressed to meet the expectations of his new employers.

The problem of wild-eyed optimists overpaying in auctions was first elucidated in 1971 in an obscure oil industry trade journal. Three engineers detailed the problem seen in auctions for oil drilling rights. Before bidding, each firm had its geologists examine the survey data to estimate how much oil the field probably holds. One firm's estimates may be lower than the actual amount of oil in the field. One firm's estimates will be about right. And at least one firm will predict estimates that are higher than the actual amount of oil in the field.

Because firms base their bids on their estimates, the firm with the most optimistic estimates will offer the most money for the drilling rights. So unless every firm underestimates the amount of oil in the field -- possible, but certainly not likely -- the firm that wins the auction will end up losing money on the deal because it overpaid at the start.

Now, instead of oil and drilling rights, think of baseball players and seven-year contracts. One general manager is always the most optimistic of all the GMs pursuing a particular player. There's always one GM who will look at a player with the rosiest of glasses, expecting the player to improve his performance or incorrectly evaluate his true ability. That GM is the one who wins the bidding war.


	The Braves traded for the veteran B.J. Surhoff despite the fact that he is just a career .281 hitter.

But if the player then doesn't take the step up the GM expected him to take, his new team ends up the loser by winning: they got their man, but they overpaid. Add to that the pressure on contending teams to "improve the team for the stretch run" and all the other nonsense that convinces teams that B.J. Surhoff is a better player than his 770 OPS says, and you have a recipe for irrational exuberance.

One economist's solution for businesses to avoid the winner's curse was to encourage competitors to bone up on the theory as well, in the hopes that all firms would lower their bids to rational levels. In baseball, that's called collusion, and that's a four-letter word (like "Miller" or "Rocker") in executive suites around the majors.

So instead, we see teams spend themselves silly, throwing around money and prospects, because the difficulty of projecting baseball performance -- and the disagreement over how to measure it -- produces wide variations in estimates of how Player X will do the next five years. Needless to say, if you ask five GMs how good Barry Larkin will be in 2003, you'll get five answers that are all over the map, with the actual result probably somewhere in the middle.

This is not to say that teams should not make trades or sign free agents. Indeed, some trades that appear to be extremely lopsided serve both teams well when one makes the playoffs or the World Series and the other acquires several young players who become impact players down the road. The laughably misnamed "White Flag Trade" between the Giants and White Sox in July of 1997 comes to mind: the Giants acquired plenty of pitching and won their division by six games, while the White Sox acquired six talented prospects in return, several of whom have been key contributors to this year's division-leading squad.

Instead, the implication is that major-league teams should avoid the biggest bidding wars and concentrate instead on players who are attracting interest from fewer teams. The Mets gave up little for Mike Bordick despite their obvious desperation for a solution at shortstop, largely because no other contender was actively looking for a shortstop, and then stole Bubba Trammell in a second deal because he'd been underutilized and thus wasn't widely coveted. The Devil Rays lucked into one of the offseason's greatest pitching bargains by taking the unwanted Steve Trachsel, then managed to convert him into a legitimate second base prospect (Brent Abernathy) at the trading deadline.

Returning to our original example, you can see how Jim Bowden got a great deal while Gerry Hunsicker gave up two pitchers in Freddy Garcia and John Halama that he'd really like to have right now. Bowden knew even before Griffey's announcement that Griffey was unlikely to accept a trade to anywhere but Cincinnati, so he could stick with a low offer and wait Seattle out. Hunsicker, on the other hand, knew that the Yankees and Indians (at the least) were chasing Johnson, and he had to submit a competitive bid -- and probably wound up paying too much.

So when your hometown team is chasing free agents this winter, you may not want to root for them to succeed in landing the big names. It might turn out to be a really rotten deal.

Keith Law writes for the Baseball Prospectus and is also a contributor for ESPN Fantasy Games. Keith may be reached at klaw@baseballprospectus.com.


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