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What Moneyball Missed

Friday, April 3, 2009

The blockbuster book that has transformed sports did not give baseball enough credit for creating the conditions that the A’s were able to exploit.

With another baseball season about to start, a lot of teams, and even more fans, should be feeling optimistic about their chances this year. The low-budget Tampa Bay Rays’ thrilling run to the World Series last year continued a trend of underdog, outspent teams hanging with the big guys right to the end. It is impressive enough that 13 different teams have won their league pennant this decade, and that seven different teams have won the championship. But what makes it even sweeter is where some of those teams came from.

The Rays ranked second to last in payroll last year; the runner-up in 2007, the Colorado Rockies, ranked 25th out of 30; the Arizona Diamondbacks and the Cleveland Indians, who also made the 2007 playoffs, ranked 26th and 23rd in payroll, respectively. Back in 2003, the 25th-ranked Florida Marlins won the World Series.

And then there is the team at the vanguard of this new era of competitiveness, the Oakland A’s. During their remarkable four-year run of playoff appearances from 2000 to 2003, the A’s ranked 25th, 29th, 28th, and 23rd. (Salary data is from the USA Today Salaries Databases.)

Low-ranked teams are not only to be reckoned with, they are competitive in spite of much smaller payrolls.

It is not only that lower-ranked teams are to be reckoned with, but that they are competitive in spite of much smaller payrolls. Last season ten teams spent more that $100 million on player salaries, with the Yankees leading the way at more than $200 million. Eleven other teams spent less than $70 million. For all that money, it is impossible to tell who spent what by looking at the standings. The Seattle Mariners got a pathetic 61 wins for $117 million, while the Minnesota Twins spent about $57 million for 88 wins. In short, payroll cannot tell us very much about win totals in Major League Baseball (for those of you scoring at home, the correlation between wins and payroll for the 2008 season was a meager r=.3).

Price is supposed to be an indicator of value. The ability to spend twice as much as another team should be a huge advantage; that’s why the other major sports leagues have to use salary caps to achieve parity. So how on earth is baseball so competitive?

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At the beginning of the decade, after the free-spending Yankees had been to four World Series in a row (winning three), it looked like baseball’s championship went to the highest bidder. Commissioner Allan “Bud” Selig insisted that small-market clubs could not compete. He wanted to “contract,” that is, eliminate, two of them, one of which was the Oakland A’s. The only problem was that the A’s were winning. From 1999 to 2002 Oakland won 383 baseball games, the same number as the Yankees—and more than any other team except the Atlanta Braves. Selig tried to explain away their success as an “aberration.”

That wasn’t good enough for Michael Lewis, until then best known for his book about Wall Street, Liar’s Poker.He wanted a better explanation of how “one of the poorest teams in the league” managed to win so many games.

Moneyball missed something. That something is known as the reserve clause.

His answer appeared in 2003 as the best-selling, much-loved, and fiercely debated Moneyball. The A’s, Lewis wrote, were able to win in spite of their relative poverty because the other 29 Major League Baseball teams were playing the game wrong. Intensely competitive A’s General Manager Billy Beane wanted desperately to win, and he was willing to look well beyond the traditional beliefs about how baseball worked in order to find ways to beat the competition.

Oakland’s front office sought out the unique statistical analyses popularized by the then-obscure baseball writer and analyst Bill James. James, as Lewis tells it, thought that baseball players’ talents were being measured incorrectly. For instance, teams insisted on “scouting” players by watching them on the field, as opposed to mining as much data as they could. Failing to scour the numbers was ridiculous because, as James put it, “the difference between a .300 hitter and a .275 hitter [i.e. good versus mediocre]. . .is one hit every two weeks.” Building on these types of insights, the A’s front office determined that baseball’s talent pool was an inefficient market. And as would be the case with an inefficient equity market, there were bargains to be had. In Lewis’s story, the A’s were winning because they were good at buying undervalued assets.

It makes economic and baseball sense to work to find and collect as many skilled young players as possible.

The rest of the league overpaid based on measures commonly used to determine the worth of baseball players (such as runs batted in and batting average) and so-called intangibles like “clutch hitting,” which Beane colorfully referred to as “f***ing luck.” They simultaneously missed, ignored, or simply did not believe in mundane qualities like walks and on-base percentage—qualities that the A’s thought could produce wins. Oakland even found inefficiencies they could exploit on the field. The team would not waste outs on things like bunting, stealing bases, or the hit-and-run; the data showed that these tactics were “either pointless or self-defeating.”

The only problem was that Lewis’s explanation for the A’s success was the same as Commissioner Selig’s—the team was an aberration. Since “most every other team looks at the market pretty much the same way,” as Lewis explained, if every team tried to exploit these same inefficiencies, then no team could. The market would correct, and the most valuable players—i.e. the players with the attributes most likely to produce wins—would be bought by the wealthiest teams. The championship would be for sale again.

But it isn’t. Moneyball missed something. That something is known as the reserve clause.

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The problem with likening the market for baseball players to an equity market is that the former is not a genuinely free market. The reserve clause binds players to the team that drafted them for the first six years of their career; during this time they cannot become free agents and sell their services to the highest bidder. So the intrinsic value of a highly productive player will rise, but he will not necessarily be paid his market value until he has completed his “indentured servitude” (as Lewis termed it). Thus it is not surprising that while payroll cannot tell us anything about wins, it does a pretty good job of predicting a team’s average age: young players are much cheaper.

To understand how much the reserve clause matters, let’s look at the young talent on the Oakland squad Lewis chronicled. Shortstop Miguel Tejada hit 30 home runs for the low, low price of $290,000 in 2000. Two years later, when he won the American League MVP, he made only $3.5 million (I know, but it’s all relative). His free agent contract, which he signed with the Baltimore Orioles after the 2003 season, was for $72 million over six years. Eric Chavez (whom the A’s actually did sign to a long-term market-value contract in 2004) produced 32 home runs in 2001 for $625,000.

The A’s were winning because they were good at buying undervalued assets.

Mark Mulder, Tim Hudson, and Barry Zito, the A’s “big three” pitchers, led the team to the 3rd, 2nd, 1st, and 1st American League ERA ranking, respectively, from 2000 to 2003. In 2001, when the A’s won 101 games, the combined salary of Tejada, Chavez, MVP-runner up and all-star first baseman Jason Giambi, Mulder (21 wins), Hudson (18 wins), and Zito (17 wins) was under $8 million. In the first year after each player’s “indentured servitude” ended, the six made a total of $43 million. The A’s won even though they were poor because they did not have to pay their young players what they were worth.

Giambi, who won the MVP in 2000, epitomizes the economics of baseball. He joined the Yankees as a free agent after the 2001 season. In that first year with his new team, he made more in salary than in the seven years he spent in the A’s organization combined. This turned out to be some deal for Oakland. As the San Francisco Chronicle’s Vlae Kershner recently pointed out, Giambi produced about half of his career home runs and RBIs in an A’s uniform. For that output, the team paid about 9 percent of his career earnings (up to the end of last season).

Just as the A’s could not have afforded to compete without the reserve clause during their “moneyball” run, no small-market team could compete without it today.

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Beane and Lewis demonstrated that any team could win by running an innovative, efficient organization. Once expectations were divorced from payroll, the onus for performance shifted from the diamond to the front office; teams could not plead poverty to explain away futility. This wake-up call to management is the enduring aspect of Moneyball. It is redefining the game.

Well-run teams across the league are moving to exploit the reserve clause inefficiency.

No general manager will keep his job for long if he tries to build a team by chasing mediocre journeymen or throwing a bunch of career minor leaguers on the field because he cannot figure out how to acquire talented young players. Well-run teams across the league, particularly those with no money to waste, are moving to exploit the reserve clause inefficiency. It makes economic and baseball sense to work to find and collect as many skilled young players as possible. Players in the early part of their career are a precious but inexpensive commodity because they can help teams win while playing for less than their actual free market (i.e. free agency) value.

Once teams have found the players that can help them win, they can try to lock in these gains to ensure that they stay ahead of the market for years to come. Baseball writer Tom Verducci recently noted in Sports Illustrated that teams are moving toward “placing more and more value on young players under control.” That is, they are signing their young players to contracts that extend past their years of indentured servitude. Doing so may mean paying a relative premium in the short term, but the team in turn can still afford the player after year six.

The Seattle Mariners got a pathetic 61 wins for $117 million, while the Minnesota Twins spent about $57 million for 88 wins.

Take what the Tampa Bay Rays did with their rookie third baseman Evan Longoria. Since they considered him the cornerstone of their team, they signed him to a nine-year deal that could be worth up to $44 million. Ordinarily, the way a player of his talent (assuming he lives up to it) would earn that much money would be by toiling for a total of, say, $10 million to $15 million for six years and then signing a blockbuster free-agent deal that would pay $13 million to $15 million per year over the next three years and beyond.

In effect, teams are now amortizing the value of their top players over the life of their extended contracts, as opposed to exploiting the services of these players at a steep discount and then allowing them to be compensated (literally and figuratively) by one of the big-spending teams later in their careers.It works because it is mutually beneficial. Teams hedge against the player becoming unaffordable, while the player does not have to perform like a superstar for half a decade to finally get paid like one.

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Moneyball was not wrong, necessarily. It just did not give Major League Baseball enough credit for creating the conditions that the A’s were able to exploit. And when Beane took over in Oakland there were indeed an embarrassment of inefficiencies. With the reserve clause, the A’s were not only able to buy and hold young talent, but were also able to find undervalued mid-level free agents because the rest of the league threw their money at the latest huge stars to finally hit the market.

Teams hedge against the player becoming unaffordable, while the player does not have to perform like a superstar for half a decade to finally get paid like one.

Also, thanks to the reserve clause, it did not matter when everybody eventually caught on to what the A’s were doing. Last year, as the A’s were suffering through their second mediocre season in a row, Baseball Prospectus’s Christina Kahrl argued that it was finally happening—there were no more valuable players whose market value had dropped. “Scaring up useful players from among journeymen and minor league veterans… gets a lot more difficult when everyone knows to fish those waters,” she wrote. At the time the A’s were jettisoning veterans and getting younger.

And look where we are today. As we have seen this offseason, teams are hoarding young players and are less interested in pursuing free agents. As a result, a number of older, potentially productive players were available at a discount. The A’s have been able to scare up useful aging veterans to plug holes in their lineup. They signed, for example, Jason Giambi, of all people, after he was let go by the Yankees.

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As the league slowly corrects the reserve clause inefficiency by paying players what they are worth before they hit free agency, we will see a smoothing of salary distribution throughout players’ careers. Young players will not be as inexpensive and older players will not be as overpaid. Top free agents will become scarcer over time; their hometown teams have found a way to keep them. In a way, this change will be toughest on the big-spending teams that rely predominately on the free-agent market, and whose fans demand that they pursue marquee names.

The excess supply of middling free agents this offseason a mere two seasons after a drought—along with the signing of a few huge free agent contracts—shows that baseball is not on the verge of equilibrium just yet. However, now that there is no doubt that money isn’t everything, teams must continually strive to be better at finding talent and exploiting opportunities they think other teams are missing. Any team that wants to win will always be adjusting its personnel strategies to figure out how best to take advantage of the built-in imbalance between young and old in Major League Baseball. Payroll will matter less and less, management will matter more and more, and the game will stay competitive.

Adam Fleisher is assistant editor of The National Interest and an A’s fan.

Image by Darren Wamboldt/The Bergman Group. 

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