04 February 2012

Brian Roberts is Not a Sunk Cost

When I start to write about Brian Roberts I think about the article I wrote when he signed his extension.  I initially used an aging model I created based on the aging patterns of second basemen.  It projected Roberts to be replacement level in 2012 and then performing in 2013 at such a level that he would have had to have been released.  That model was run right after his 2008 season in which he performed at an All Star level and could have been considered one of the top second basemen in the game.  I hesitated and decided instead to use a model based on middle infield aging.  I pulled a punch.  The article still stated that Roberts' extension was a poor idea, but it irritates me that I wrote more what I felt than what I thought.  Whether good or bad, tick off three years on the clock and it no longer is a concern for me.  Well, it is not as much of a concern because part of me still feels bad writing this.  I think I have become more hardened as evidence by what I wrote last March on him.  I like Brian Roberts.  I also think he should be removed from the 40 man roster.

Sunk Cost

Sunk cost is an economic concept that is much ballyhooed and much misunderstood.  You may have seen such players as Vernon Wells, A.J. Burnett, or Barry Zito referred to as sunk costs.  This is an incorrect application of the term.  Off the bat, their contracts would be the sunk cost, not them.  Second, the term refers to making a payment that cannot be recovered.  The sunk cost fallacy refers to a situation where someone feels too invested having made a sunk cost and throws more money into the effort.  Throwing good money after bad idea is considered irrational.  Here is an example:
Lets say you bought tickets to take your eleven year old kid or maybe a niece to see Disney Princesses on Ice.  Somehow in the few months between buying those tickets and the date of the show, your young blood relative realizes that going to this show will bring about teasing from her friends.  At this point, the money has been spent and nothing good will come from it.
Now, that is almost a sunk cost.  That example is similar to that of Wells', Burnett's, and Zito's contracts.  What would make the above example a true sunk cost is if Disney folds with no show and no refunds.  That is a true sunk cost.

The above example is not quite like the Brian Roberts contract situation.  More accurately:
Lets say that your niece and maybe even you being nostalgic are looking forward to the Disney on Ice show.  You buy your tickets, you eagerly await for the date of the show, you get to the arena, buy your favorite junk food and maybe a souvenir or two, and sit down for the show.  Fifteen minutes in to the show both you and your niece realize that this is the opposite of fun and you both are miserable.  
This is a sunk cost.  You cannot scalp the tickets.  What comes next is the interesting part.  Having spent money on the show, do you sit and watch the show even though it is not enjoyable?  Based on a plethora of studies over the past 20 years, two thirds of you will likely stay put and have a horrible night.  The other third will go get ice cream or fudge a couple blocks away at the inner harbor and call it a decent night.  Why will the majority stay put?  Emotional attachment to cost allocation.  This is the Brian Roberts Contract Scenario.

The Man

Brian Roberts has been Mr. Oriole for the 2000s.  He shifted from shortstop to second, fought off the more acclaimed Jerry Hairston Jr. (who was then traded for Sammy Sosa), and gave the Orioles the solid kind of lead off hitting that the 1990s Orioles enjoyed from Brady Anderson (minus a little bit of power).  His 2005 and 2008 seasons were at very good starting all-star level years.  He was exciting on the base paths and always seemed to start a rally with a double in the gap.  Roberts has been solid.  So solid and so much identified with the Orioles that Andy MacPhail's team extended Roberts a year prior to his free agency to a four year, 40 MM extension.  It was a contract that overshadowed the one Orlando Hudson, who slashed 305/367/450 in 2008, signed within a few weeks.  That one was for one year and at 3.3MM.  During the same period (2010-2013), Hudson will be paid 22MM vs Roberts' 40MM.

While Hudson's skills at second base have deteriorated, he has managed to appear in 245 games over the past two seasons and is expected to be manning second base for the Padres for the next two years.  Brian Roberts has been less fortunate.  In 2010, the fate of second base aging began to materialize for Roberts.  Roberts had issues in Spring Training with abdominal muscle strains and a bad back.  These issues continued throughout the season and left him with 59 appearances where he kept up his typical offensive performance.  However, his defense looked shaky.  This was the first year of his four year extension.  In 2011, illness, his back, and concussion symptoms led him to having a choppy Spring Training and only 39 appearances.  He was shut down in the middle of May.  His issues with concussions have been so bad that he was unable to make it to the 2012 Orioles FanFest.  For a player who has done so much for the community, it was surprising he was unable to attend.  To expect someone who cannot make a flight and deal with the chaotic nature of FanFest . . . to expect that person to play at a professional level is quite optimistic.  Sadly, I think it is clear that Brian Roberts' contract is a sunk cost.

Conceptual Value for a 40th Man

During the off season there is no 60 day disabled list.  Roberts must stay on the 40 man roster which effectively makes it a 39 man roster.  This issue is relative.  The 40th man on any roster is not likely to be of great use to a team, but it does prevent a team from potentially getting looks at certain fringe players in Spring Training.  There is benefit to that.  There is benefit to having Pedro Florimon Jr on the team.  There is benefit to having Kyle Hudson on the team.  There is benefit to having Rick VandenHurk on the team.  One thing is clear, the team is not losing anyone of great significance.  None of these guys will take you anywhere, but the first two provide depth in case of injury.  VandenHurk may provide you with a decent enough arm if the Spring proves treacherous for the Orioles' pitchers.  Additionally, sometimes a player just sort of figures things out.  Simply put, the 40th man is a low probability, low ceiling player. 

The difference between Roberts and the 40th man is that the 40th man can actually stand out on the field and potentially do one or two things adequately.  Roberts cannot lace up.  A year in and still suffering from concussion symptoms is not a promising thing.  In baseball, we've seen how concussions have ended Ryan Church's career and have severely impacted Justin Morneau's.  In hockey, we have seen what Sydney Crosby is going through.  In football, the data is coming out that is yielding more evidence that teams do not adequately protect players from the effects of concussions.  This past year, we have even seen reports showing that high school soccer players show some concussion effects in relation to simply heading a ball.  It has been truly an amazing and terrifying time these past few years with understanding the chronic effects of these kind of brain injuries.

That said, the comparison between Roberts and a 40th man is not truly a fair comparison.  The more fair comparison would the 40th man vs. a MiL invite who becomes the 40th man.  The difference between those two is not truly great.  They are likely the same person.  Pedro Florimon, Jr. was put on waivers, claimed by the Twins, put on waivers, passed through, and is now in the Twins' minor league system.  Kyle Hudson is a non-roster invite to the Rangers' camp.  Rick VandenHurk is likely to find something similar somewhere.  It appears that the idea that Roberts is preventing roster flexibility is likely one that is true in conceptual terms, but not in true application.

Brian Roberts is Not a Sunk Cost

My analytical side is informing me that Brian Roberts' contract is a sunk cost that does not affect the team to a significant degree (meaning significant in an abstract way).  However, even though the contract is a sunk cost, Brian Roberts is not.  Roberts has value to this organization in other potential capacities.  The problem I see with the current situation is that Roberts is a great person who has done wonderful things for the organization and the community.  The contract is an unfair burden to place on him because it carries with it the expectation that he needs to get back in shape to play.  The best thing I can see doing would be to buy him out and give him a place in Brady Anderson's chain of command in player development.  From all accounts, Roberts is has a strong work ethic when it comes to fitness, he comes from a committed baseball family, and he seems to enjoy Baltimore.  It would be solid to keep him in the organization.

In terms of a buyout, you can go two ways.  Pay him now in a lump sum or convert it over to a long term deferred deal.  If he trusts his investment team, you could probably buy him out now for 18MM instead of 20MM over two years.  That appears somewhat marginal in terms of cost cutting.  A long term deferred deal could look like 3MM/year over ten years or 2MM/year over twenty years.  The long term deal would be useful to the club in the near term, saving the team 7-8MM a season.  That is money that could be well spent on player development or even an average player.  I think this is a solution that would benefit both parties.

Of course, this discussion is unimportant if while on the disabled list with concussion issues the insurance plan the team has on him is favorable.  If insurance is paying the club anything more than 20% if Roberts' salary then it makes sense just to keep him on the 40 man roster.  The terms of such an arrangement may be so that Roberts cannot do other things that would be helpful such as instructing players or scouting.  If that is the case, then a buyout between the Orioles, Roberts, and an insurance company would make it far more difficult. 


Weams said...

Very sound article Jon. Thanks

Joe Tiburzi said...

one thing that i think is important to remember is that every contract in major league baseball is a sunk cost the moment it is signed. given that all contracts are guaranteed, the team is on the hook for the full value, regardless of what the player does for the remainder of that contract. a buyout is just the value of converting that contract into a single payment - it should be the economic equivalent of playing out the contract to the end.

we tend to think about sunk costs with the worst contracts, but really all contracts are sunk and there are two separate pieces of the equation to consider. one is the budget side, in which all costs are real. if the orioles are tied to a strict budget and therefore unable to sign another player because of the total value of contract obligations for current or future years, then that's a real problem, not a sunk cost issue (which, as you mention, is based on an emotional attachment, not a financial constraint). i don't have access to the orioles' financial info, but i really don't believe this is a problem. the orioles aren't within $10M per year through 2013 of going under.

the other side of the equation is the baseball side. if the orioles are making baseball decisions based on any player's contractual obligations and not on the basis of their ability to help the team win games, that's a huge problem and that's where sunk costs come into play. for example, refusing to sign, trade for, or draft another second baseman, even one who fits into the team's budget, would be idiotic. they should be looking to replace every player with a better option as soon as one becomes available, as long as the value is right.

great post. i like looking at the economics.

Jon Shepherd said...

Joe...I agree with much of what you said.

However, I think the term sunk cost is bandied about too much. I think it is difficult to make the argument that all contracts are sunk costs to the team. The money is usually movable.

Lance Rinker said...

Great article Jon - a really in depth piece about one of the Orioles more important players heading into Spring Training. Then again, Roberts has been our most important piece in the lineup and the field for the last decade.

For many fans it's difficult to imagine that his career is prettying much winding down - with or without the head injury.

Nick J Faleris said...

Nice piece, Jon. Enjoyed it very much, and I agree with your general thoughts here.

Ryan Solonche said...

In unison with everyone else, good article.

A buyout is obviously beneficial to the club in the short term (even scraping together an Andino/Antonelli/Flaherty/Betemit combo leaves with you with like 16m invested at 2b adding roberts' contract)...

My question is: why is this mutually a good deal?

I'm not sure long term deferred payment is advantageous for anyone other than the club. As a fan I'm all in favor of investing a large portion of his contract to other very pressing avenues of interest, say in the amateur draft, in regional scouting, in retaining guys like Jordan/Klentak who could really be a part of a competitive organization, etc.

Simply, why should Robert's, apart from some sort of moral duty, not let his contract play out?

Jon Shepherd said...

Ryan - the issue for Roberts would be the interest given on the money. With the napkin scratch calculations ran, I looked at it as a 5% turn around. That is why the final amount on those long term payouts is greater (30 or 40MM) than what is currently owed to him (20MM). If Roberts prefers the sure cash payment with interest, then he will do it. If he thinks he could invest it with a better return then he will not.

Ryan Solonche said...

Hmm sure, and a deal like that does indeed offer him security in a time sensitive industry (short shelf life of professional athletes)... and even if he does get back on the field and produce which I'd assume to be very low percentage - I can't see him securing more than 1 year rental contracts until he retires... So I'd fully endorse what you've proposed, but...

Is 5% the general interest rate for deferred contracts?

Why didn't they try to do this with Belle? Or correct me if they did...

Jon Shepherd said...

As I remember it, I think insurance paid for about 70% of Belle's contract. I imagine having the three parties agree to a buyout would have been difficult.