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Daily Box Score 8/8: Unconventional Thinking

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One of the reasons I suspect unconventional thinking is so rare is because of the payoff schedule faced by decision makers. Take, for example, a young general manager who would like to trust late innings of games to a young but promising bullpen with no fixed closer. He will face howls of scorn if the plan does not payoff. He will almost certainly never have a job again. If it works, he might expect a few blogs on the internet to notice. It's sad but true.

So unconventional thinking is rare. That can mean it is often romanticized--"if only people would think outside the box," we lament. But it's important to remember that some unconventional thinking is ill-advised. It is to that unconventional yet uninspired thinking that today's box score is dedicated.

Table of Contents
The Managerial Decision
The Contract Clauses
Prospects as Junk Bonds
Discussion Question of the Day

 

The Managerial Decision

Take, for example, this FanHouse headline:

Walk Pujols With the Bases Loaded? It's Not as Crazy as It Sounds

My first thought was, "OK, let's give it a go. Maybe there's some reasoning here I hadn't considered."

It sounds ludicrous, I know. Why would you walk a run in on purpose? How does giving the other team a run help your team? Good question. Here's a better one. How does throwing pitches over the heart of the plate with the bases loaded to Pujols -- who netted his fifth grand slam of the season last night -- help your team? Isn't it better to give up one run than two, three or four? Do you play Russian roulette with five bullets instead of one?

The author goes on to cite the statistic (which you've no doubt seen) that Pujols is 7-9 this season in bases loaded situations, and that he has 5 HR in those same situations. So my second thought was, "Nope. It's precisely as crazy as it sounds."

Keep in mind that intentionally walking Pujols with the bases loaded guarantees one run will score, and it does nothing to change the base/out state. There is simply no player, no matter how good, who is worth more than a run over any other player over the course of a single plate appearance.

The author goes on to say:

So, go ahead, managers of the baseball world. Buck tradition. Throw caution to the wind and walk Pujols with the bases loaded.

If nothing else you'll infuriate La Russa.

I can't claim to be privy to the inner monologue of Tony La Russa, but I also can't imagine the emotion involved would be infuriation.

The Contract Clauses

There's some great stuff at Cot's Baseball Contracts. It's well worth your time to browse around for a while. But it turns out, if you look long enough, you'll start to notice some very unconventional thinking. Jorge Says No! did just that, and the results are highly entertaining. Here are some highlights:

Roy Oswalt: contract also re-worked 10/05 to allow Houston owner Drayton McLane to give Oswalt a bulldozer for winning Game 6 of '05 NLCS

AJ Burnett (Jays): deal includes 8 round-trip limousine trips per season between Toronto & Burnett's Maryland home for his wife

As funny as these contract clauses sound, I think they may be an example of intelligent unconventional thinking. It reminds me of when, on Deal or No Deal (which forms one end of the Ideal Game Show spectrum), the banker offers some prize that is related to a contestant's personal interests (think VIP tickets to a concert), but that almost certainly does not carry a cash value significant enough to affect the expected value calculation but makes the contestant much more likely to accept. 

It's not that I think these players have been duped, but rather they put a lot of value in the item they are receiving. Plus, how cool must it be for Oswalt to say, "I got this tractor for winning Game 6 of the 2005 National League Championship Series."

Prospects as Junk Bonds

The Wall Street Journal has always catered to the investor class, offering top quality market and business news. So it's understandable their writers and readers look at the world through the lens of price-to-earnings ratios, hold-to-maturity prices, and loan-to-value ratios. So I wasn't entirely surprised when I saw that they had enlisted former Pepsico CEO and author of Diamond Dollars Vince Gennaro to write a piece on prospect valuation.

What was somewhat surprising to me was his methodology, which was based on the way investors value non-investment grade bonds (colloquially, they are known as junk bonds). These bonds do have some similarities to baseball prospects: the promise of high payouts with a concomitantly high chance of busting out altogether.

His subject, of course, is Stephen Strasburg:

Based on a valuation model I’ve developed that considers all aspects of a player’s expected performance, as well as his age and position, Mr. Strasburg’s value in baseball’s version of an open market—free agency—is $44.5 million over the next six years. But since he’s a draftee and can only sign with the Nationals this year, he’s likely to earn $20.4 million in salary—not counting his signing bonus.

Sounds like a no-brainer for the Nats, right? But wait! An important part of junk bond investing is accounting for the risk of no payout whatsoever:

Before the Nationals shell out any money, they’ll have to do what any seasoned asset manager does: build in a discount based on the risk of default. In the past two decades, 25% of baseball’s top pitching prospects never panned out—which makes these skinny kids about as risky as a below-investment-grade Triple C bond.

I have tried to reverse engineer this valuation, which is very difficult since Gennaro does not provide his methodology. At first I presumed it he applied the discount rate (note that this is unrelated to the amount the team could earn by investing the same amount of money, which is how Victor Wang came up with 8%), compounded annually, like this:

 

$24.1/(1.29)^6 = Discount value

 

Where $24.1 is the surplus to the Nationals in millions, 1.029 represents the discount rate Gennaro cites, and six is the length of the bond in years. However, this results in a valuation of just $5.23 million, less than half of the $11 million dollars Gennaro derives in his article. I am also not sure if the 25% default rate is the yearly risk of default or rather the risk that a top prospect never pans out of the course of his career. If any of you are financially savvy and care to help, I'm all ears.

Discussion Question of the Day

Let's take the Strasburg example and ask two related questions. How much do you think Strasburg will actually receive in total dollars? Secondly, how much would be the maximum the Nationals could pay and still reap some surplus from the deal?

Intuitively, $11 million strikes me as a bit low. What do you think?