August 18, 2016

Tools of Ignorance

The Trades Remain the Same

by Jeff Quinton

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By all accounts we just wrapped up a thrilling trade deadline. The volume, the drama, the last minute-ness, the quality of players—both major and minor leaguers—was more than those looking to be entertained could have hoped for. Those (if such a population exists) looking for variety in trades, though, were likely disappointed. Sure, we got a good, redundant major leaguer for another, somewhat redundant, major leaguer trade in the Matt (Duffy and Moore) swap, and a salary dump (Liriano to the Blue Jays), but every other trade was minor leaguers for major leaguers (usually on contracts expiring at this or next season’s end). There are tons of variations within this type of trade, but it is all the same kind of trade. This type of trade, of course, makes sense—teams that have a chance to win this year value certain players more than teams that do not have such a chance; and when two teams value a player a differently, there is always an opportunity for a trade.

But, why then, do certain players that should be valued differently (such as Jeremy Hellickson) not get traded? Also, how is it possible that over the past 10 years, no two teams have said, “I like your third baseman more than my third baseman and you like my third baseman more than your third baseman” and just swapped them? Or how has this not happened for any other position? We see this once in a while with sixth starters and inconsequential relievers, but we never see this with any primetime players. Why don’t we see this? I believe there are several contributing factors that I will discuss below. I also believe there are several (or more) contributing factors I have not thought of and, thus, will not discuss below.

1. The Endowment Effect
The endowment effect is a hypothesis that the value we place on a given thing increases upon owning a given thing. This goes beyond our tendency to own what we like, as demonstrated in a famous study conducted by Daniel Kahneman and Richard Thaler in which one group of university students was given coffee mugs decorated with the university’s insignia and the other group was not given anything. The first group, when asked how much they would be willing to sell their mug for, responded, on average, with $7.12. The second group, when asked how much they would be willing to buy the mug for, responded, on average, with $2.87. In other words, possession matters to how we value things. We are, if fortunate enough, happy to provide our own children with three meals a day, but we usually are not willing to do so for kids that are not ours (another case to be made for taxes). Moreover, it seems preposterous that one parent or set of parents would say, “I like my kid just fine, but he is very rambunctious and I always valued calmer kids more, maybe I can trade with another parent who prefers rambunctious kids, but has a more laid-back child.”

This is all to say that if two major-league players (or two minor-league players) are close enough in value to actually be reasonable swaps for each other, the endowment effect will work to eliminate any chance of a trade because each team will overvalue its own player. Teams, however, are not ignorant to the endowment effect, but knowing of its impact actually works to further reduce the possibility of such trades. How so? Possibly, this happens because of information asymmetry.

2. Information Asymmetry
Knowing what there is to know about the endowment effect, we can thus imagine what any general manager is thinking when another general manager calls them up and asks, “Hey, any interest in Player X?” To put those imagined thoughts into words, they are probably thinking, “Why are they trying to trade Player X? What’s wrong with Player X that they are trying to trade him? What do they know about Player X that I do not know about him?” Particularly in the case of trades, where all teams attempt to give up as little as possible for the highest possible return, teams are not going to trust each other. And when parties in negotiation with each other do not trust each other, deals tend not to happen.

But trades do happen, they are just almost all the win-now for win-later trades that we described previously. So how do these trades overcome information asymmetry and the endowment effect? Possibly, this happens because such trades are defensible.

3. Defensive Decision Making
In Risk Savvy: How to Make Good Decisions, psychologist Gerd Gigerenzer explains that when faced with uncertainty, we (people) make decisions that we feel will be defensible in the future should something go wrong, rather than choosing the option that gives us the best odds of accomplishing whatever it is that we are trying to accomplish. What does this have to do with Major League Baseball trades, specifically ones in which prospects and players on expiring contracts are swapped? Well, those trades, the now-for-later or later-for-now trades are almost always defensible so long as one’s team is actually in (regarding the former) contention or (regarding the latter) out of contention. If the prospects miss, well, prospects come with a failure rate. If the rentals are not enough to produce a championship or make the playoffs, well, only one team wins each year and winning a championship is hard.

Conversely, this is why we never see a Carlos Correa for Francisco Lindor type trade, because if you miss, there’s no defense of the miss. On the Fringe Average podcast, Jason Parks explained that while an Oscar Taveras-Jurickson Profar swap might make sense on paper, it did not make sense in practicality because it did not make sense from a job security perspective, because if you are the general manager that misses on that trade, you will be out of a job.

It is thus easy to say that if teams made their front offices more secure in their jobs that front offices would be able to make better decisions unencumbered by fear of losing one’s job. But that’s how Josh Donaldson gets traded away and then it doesn’t seem so great. That’s the downside and it is horrifying. Even though such a management policy might be best over time (even if it’s also the way in which one can acquire Josh Donaldson), it thus has to be awfully difficult for a front office to act on such a policy or for an owner to greenlight any of these types of trades.

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