On Opportunity Costs

in the comments of yesterday's main thread, LB made an important statement here, which i'll excerpt:

a factor i completely overlooked in the main post is the high opportunity cost that attends any long-term deal that’s handed out to a pitcher. when you lock in a mediocrity (or worse) with a long-term guaranteed deal, it costs another, potentially better player a chance to come in and upgrade your organization.

he goes on to say that opportunity costs go both ways, which is definitely true. i replied in that thread trying to flesh out that point, but i think that it might get missed by a lot of people since i posted it late at night towards the bottom of the thread. but here's what i said with a few improvements:


herein lies the problem with citing opportunity costs: you never know in which direction those might point, because none of us have perfect information ahead of time. the entire point of using the concept of opportunity costs as a decision-making tool assumes that actors act rationally, and actors can only act rationally if they have complete (or near complete) information about the outcomes of the alternatives in front of them. those assumptions don’t hold here.

as examples: nearly everyone here (including me) decried the Looper signing at the time, and yet we got one above-average relief season out of him and are in the middle of getting two roughly average starting seasons, all well below the established market value for those levels of production. nearly everyone here hated the Wellemeyer signing last year (including me) because he was gonna take a spot away from a younger player who had more room to develop. then everybody hated his movement from the bullpen to the rotation for the same reason (even more: he was replacing Kid Reyes). Welly and Loop have been pretty huge successes for us, given the cost and the performance of the players they replaced. Encarnacion (even before his unfortunate injury) and Kennedy have not been. Piniero, in my view, is in the middle.

several years ago, the Cards decided not to sign Burnett because he wanted a fifth year added on to the contract. some here supported that decision and some opposed it. in retrospect, given the contracts to pitchers like Suppan, Batista, and Silva, the Cards should've either included the 5th year or bumped up their offered Average Annual Value of the contract by offering more money over 4 years. but it was impossible to know at the time: Burnett had a history of injuries and inconsistent performance. if we'd had Burnett for the past three years, we might've been better able to absorb the injuries to Carp, Mulder, and Wainwright over the past two years. then again, maybe Waino never would've made it into the rotation. maybe Reyes and/or Wainwright would've been traded for somebody else.

all of these are opportunity costs of a selected action. some of them might've worked out. some of them might not have. the point is, you never know beforehand, so simply citing “opportunity costs” without qualification — or even definition — doesn’t really mean anything.

so if we hadn’t signed Welly and Looper (or if we would've signed Suppan, Batista, Silva, or Burnett) we would’ve suffered the opportunity cost of losing (or gaining) the marginal benefit of their production over their replacements. in some cases, that would have been a net gain. in some cases, it would have been a net loss. both the positive and negative gains are examples of opportunity costs, but that fact alone doesn’t tell us anything about whether or not we should sign FAs in the future, or simply promote from within.

the point is, as LB mentioned but didn't really elaborate, opportunity costs run in both directions. we’re dealing with imperfect information here and can’t predict future performances with certainty, so simply citing “opportunity cost” as the sole or primary reason not to sign a FA (or as a reason *to* sign one) is nothing more than a rationale for a previously determined preference. there's a word for that: "bias". it would be just as (in)valid to say that playing an unproven prospect rather than signing an established vet entails an opportunity cost, albeit in the opposite direction, and that would be a bias as well.

the concept of opportunity costs is powerful in its simplicity, but we need to understand what it really means. many on this board -- including me at times -- are biased in favor of player development over signing players with established levels of mediocre performance. sometimes those decisions are correct; sometimes they aren’t. but the concept of opportunity costs is value-free; it doesn’t automatically swing in either direction. opportunity costs should be part of an argument when discussing roster management decisions, and should be used in the context of predicting player performance (and, hopefully, measuring that projected performance in context of the marginal monetary costs). otherwise, it doesn't really help us, and can in fact cloud our judgment.

anyways, yeah. we all have biases, but let’s be careful not to let them sway our judgments too much. especially when we’re tossing out "scientific" theorems in support of our ideas.


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