November 20, 2014

Fantasy Freestyle

Offseason Trades and the Default Effect

by Jeff Quinton

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While no Major League Baseball games are currently being played, the offseason maintains a tight hold on our attention. The offseason brings every team back to 0-0 (for both major-league and fantasy baseball), and we are captivated by the hope of the new season and intrigued by the strategy each team will deploy.

Whereas in-season trades and moves tend to be limited by the competitive landscape, the offseason tends to be less limited, because more uncertainty exists about the upcoming season. In fantasy baseball, potential moves and strategies are even less limited in the sense that all teams have closer to equal resources because of parity-promoting rules and constructs such as salary caps, keeper limits, auction dollars, and draft rounds. Given all of this to go along with person-to-person inconsistency in valuing uncertain future assets (baseball players), one could assume that the offseason would be a time of torrent trade activity. In theory, each owner would continue to trade until he or she possesses each asset that he or she most values among his or her peers (obviously this depends on the value of the assets one originally owns, but you get the point). Put differently, because every owner would rank the top 300 players (or top 300 values in leagues with contracts) differently, one could assume that there would be trade after trade after trade until every discrepancy in valuation has been corrected.

Alas, as we all know, this never happens. We know that risk aversion and the endowment effect work to make our trade markets imperfect. Moreover, there is another factor that limits trade activity—one that is particularly acute in the offseason: choice. While choice often rides in a carriage of positive connotation, it can be paralyzing come time for decision making. This is of course a bit melodramatic, but whether or not we choose to participate in offseason trades is something that is likely to be affected by choice or fear of making the wrong choice. More specifically, the number of trade options available to us and the complexity of possible trades can subject us to the default effect. We will take a look at the default effect, how it manifests itself, and the influence it has on fantasy baseball.

First question: What is the default effect? The default effect states that decision outcomes can be significantly influenced by the existence of a default option. (Note: a default option is the choice made if the decision maker does not make a decision. For example, if the default option is to opt out of the program, then if you take no action, then you opt out of the program).

Second question: What does this have to do with offseason trading in fantasy baseball? The default option for the fantasy baseball offseason for keeper and dynasty leagues is to stand pat. Making no moves to your team and leaving all decision making up to the draft or auction requires no action on the owner’s behalf. Consequently, most leagues have far more less-active than highly-active owners. This does not mean that most owners do nothing; rather, this means that most owners need to be prompted in order to act, but we will get to that later.

Before we get into the fantasy impact, let us first take a look at the default bias and see just how much it can influence decision-making. While human beings have developed language, thought, and theory to help us explain the world, the truth is that our actions are often dictated by more simple reasons, such as default settings. There are many now famous examples of the impact of default settings on our decisions making, but organ donation rates by country is my personal favorite. The gist of the example is that the only constant among countries with high donation rates is that opting in is the default and that the only constant among countries with low donation rates is that opting out is the default. Moreover, culturally similar countries such as Germany and Austria or Denmark and Sweden, show vastly different donation rates, the difference being due to the default setting. The below is from the paper responsible for this example by Eric Johnson and Daniel Goldstein:

Ask someone why they chose or chose not to be an organ donor and you will get an answer that usually deals with morals. Rarely will you get an answer of “well, it was a tough decision, so I went with the default.” In his self-titled blog, Dan Ariely, using the above as an example, writes the following about why we can be as affected as we are by default settings:

“You might think that people do this because they don’t care. That the decision about donating their organs is so trivial that they can’t be bothered to lift up the pencil and check the box. But in fact the opposite is true. This is a hard emotional decision about what will happen to our bodies after we die and what effect it will have on those close to us. It is because of the difficulty and the emotionality of these decisions that they just don’t know what to do so they adopt the default option (by the way this also happens to physicians making medical decisions, and also to people making investment and retirement decisions).”

While fantasy baseball decisions are not as weighty as organ donation or retirement investment, the complexity of the decision can make the process of offseason trading very difficult. Given that we can trade players, minor league players, and minor league draft picks, there are thousands of different trades we could make and even more ways to negotiate those trades, let alone figuring out which ones are best or feasible. So while less-active owners will say things like “there just weren’t any trade partners that fit with my needs,” “I didn’t know that player was available,” or “I just really like my team as is for next year,” there is a lot of evidence that suggests that the default option of inactivity is what is really driving behavior.

Third question: What kind of behavior does this default option cause? From my experience, the default option of inactivity influences the who, the what, and the when of offseason trades.

The who, as in who we trade with, is affected in that we tend to trade with the familiar. Instead of navigating the vast sea of trade possibilities discussed above, decision-making becomes easier when we can narrow it down to the options available with a usual trade partner. This is why we see certain trade partners make trades over and over again. It is also why chain restaurants are popular; we know, to some extent, what we are going to get.

The what, as in the structure of the trade, is affected in that we tend to make trades that are similar to ones we have made before or that others in the league have made before (this is in combination with the effect of league norms). If we have traded a starter for a closer in the past and currently need a closer, we will tend to try to do the same going forward or that very possibly will be the first option we consider. Again, just as with the who, this allows us to make decisions by eliminating the complexity in our decision by eliminating options.

Lastly, the when is affected in that we tend to make trades at certain times each year (again, league norms are also present here). Instead of seeing if owners are interested at trading at any given time, we tend to wait until times when trade activity has peaked in the past such as after a player signs or the days leading up to our keeper deadline or draft. We can call these periods of trade activity decision-making nodes. Uncertainty and unfamiliarity increase the likelihood for us to only act at these nodes. Just as out-of-towners only make turns at traffic lights and are fearful of getting off a highway to avoid traffic jams, we fantasy owners will often only make trades at these designated times.

Fourth question: So what? Fifth question: Why does it matter that a default option influences our behavior? It matters because of supply and demand. If we only trade with the familiar or for the familiar, then we are limiting our supply of trade options and, consequently, are likely to overpay for convenience or simplicity. Also, if we only trade when everyone else is trading, then we are likely to be trading when demand is at its highest. This is a good thing when we are the one looking to trade the desired asset, but this is a bad thing when we are the owner trying to acquire the asset that multiple owners are trying to acquire. Ultimately, we want to be the owners collecting the convenience tax from the who and the what, while also being the owners benefiting from the when by trading assets that are desired by multiple parties. This is much more easily said than done. That said, there are ways to somewhat restructure the offseason choices our league-mates face in order to build trade routes and markets that would otherwise not exists. The answer to how we are going to do that will be coming in my next Fantasy Freestyle next Tuesday.

Jeff Quinton is an author of Baseball Prospectus. Follow @jjq01
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