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December 3, 2012

Baseball Therapy

Does the Way the Draft Works Now Hurt Bad Teams?

by Russell A. Carleton

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The Winter Meetings start today in Nashville. It's a time for major-league executives to get together, chat about the game, and maybe play "let's make a deal." It's nice, because in a world starved for baseball for more than a month now, there's actual baseball news being made. Or at least rampant rumor-mongering, which is almost the same thing. There are mystery teams and... OMG, was that Theo Epstein walking by with a cup of coffee?

One thing that doesn't often draw headlines (but should) is that while in the neighborhood, executives often discuss the state of the game more broadly, including issues of competitive balance. How can baseball be sure that all teams not only feel that they have a chance most years, but also actually have one. Not in that "you can't predict baseball" sense, but to actually have a team that, at least on paper, could be the proverbial "force to be reckoned with."

So, let's talk about the draft. It's been a focus of a lot of the discussion around competitive balance. The draft represents a chance for an organization to infuse talent into its system, talent that will hopefully become a cost-controlled source of production. That's vital to competing, because it means that a team doesn't have to go out into the (pricey!) free agent market as much. And now with draft bonuses somewhat capped, there's less reason to avoid certain players because of "signability" issues. But I want to talk about the draft more generally. And by that I mean the very form and idea of a draft.

Why does just about every major sporting league have a draft in which, usually in reverse order of record from the previous year, everyone lines up and takes turns selecting players? The idea is that the weaker teams get a chance to go first and (presumably) end up with better players. Intuitively, it feels fair. But are there unintended consequences of such a model?

I propose that, like a lot of other things in life, drafts work great until you consider the actual facts on the ground. First, we're talking about players who are 22 at the oldest. Many of them are 18. It's generally accepted that a player peaks in his late 20s, so we can be talking about seven to nine years between the time that the team selects a player and when we expect the full measure of his potential to be realized. Even if we set the goal as having a good contributor on the MLB roster at age 24, drafting a high school senior means that a team has to wait six years, or as I like to think of it, 25 percent of his lifetime. A lot can happen in six years. To show you how much, here's Kevin Underscore Goldstein's Top 101 prospects from 2011, which for those of you without a calculator nearby was a mere two years ago. See any names on that list that look kinda silly now? You'll note that Kevin was so awful at this that we fired him. I wonder whatever happened to that guy.

Which brings us to the team with the first pick. The worst team in the league. They have a grand total of one chance to get this right. What should they do? The stock answer is to take the best available player (but of course, how to gauge that?). We know that we're already we're working in uncertain waters, but teams do their due diligence and it's not like they're completely in the dark. There are some years where the answer is perfectly obvious. Other years, not so much. One big problem is that there are different types of players who are available within the draft. Consider Smith, the toolsy 18-year-old with lots of raw talent vs. Jones, the polished, if unspectacular 22-year-old college player.

Taking injury risk out of the equation, let's suppose that after a thorough evaluation, you project that Smith might very well develop into a six-win player, but only if things go right, and there's an equal chance that he flames out and the Ministry of Truth's sports department declares him an un-person. Jones has some development to do, but he's older and we know more about what we'll be getting out of him. His floor is a two-win player, his ceiling is a four-win player. Both have an expected outcome of being a three-win player, but one has a lot more risk involved. Your team is currently on the clock. Well?

In our over-simplified scenario above, some of that decision is going to be made based on the team's tolerance for risk. Maybe the front office is filled with guys who like the sure thing. Maybe it's filled with daredevils. In general, the fact that so many high school students are taken in the draft makes me think that there are a lot of front office folks on motorcycles jumping over the Grand Canyon on weekends. And there's a certain method to the madness. While two-win players don't grow on trees, they aren't altogether rare, and there's a chance that everything will break right for some 13th-round pick in your system and a two-win guy essentially falls into your lap. It rarely happens that a superstar just suddenly shows up on your doorstep. Still, if a system is overloaded with risky players, a GM may want to find someone a little more predictable to take with that pick. Or vice versa.

Like anything involving valuation, there is always room for inefficiency. It's easy to be seduced by the thoughts of sugarplums and blue-chip prospects doing pirouettes in your head and to believe that Smith really will justify that $5 million bonus check that you're about to give him. But suppose that there might be three lower-risk guys, mid-to-late first rounders who would sign for $1.5 million each. Perhaps they might represent the better bargain. Problem is that the current everyone-take-your-turn system doesn't allow for that possibility. Our team at the top of the draft has no way to take three players. They get only one. And given those constraints, the most logical move for them to make is often to take a high-risk, high-reward player. A struggling team's future may be riding on the electric right arm of an 18-year-old pitcher. In financial terms, you are forcing struggling teams to play high-stakes roulette for their future when a more measured, diversified-portfolio approach might yield better results.

Part of the problem is that teams aren't allowed to trade draft picks. (Yes, I know that there is some trading allowed now, although it is very limited.) In the NFL, where draft picks are passed around like the 99th bottle of pop on the wall, a team would simply try to trade down in the draft and pick up other assets. But even then, teams are hamstrung by the fact that everyone else gets only one pick per round.

How to fix it? Well, there has been some discussion on this topic elsewhere, and I have a modest proposal for MLB, just in time for your little get-together. It's time to steal an idea from fantasy baseball. Make the draft look more like an auction.

Here's how I would propose that it would work. First, the pool of money which a team may spend on bonuses can be capped, and much like it is now, it can be distributed with teams finishing lower in the standings having a bigger stack of money. This allows for the draft to promote competitive balance by ensuring that weaker teams have more resources, while capping the amount that teams will need to set aside for signing picks. Using the current formula (or tweaking it) is fine.

On draft day, teams must select 20 players (or some other number) and pay a minimum bonus of $1000, for a total of 600 picks. At the word "go", the first pick is auctioned off. Teams, probably electronically, submit bids on the right to go first, and the highest bidder may take whom they please. Note that no player is associated with the bid. Teams will, of course, have in mind whom they will want to pick, but team A might be bidding with the intention to take Smith, while team B might wish to take Jones. If Team A wins, Team B might simply bid the same amount again for the privilege of taking Jones. Some teams may simply bid $1000 (which is the Price Is Right equivalent of bidding $1) and sit back for a bit while everyone else spends money.

The catch is that the auction price of the pick becomes the player's bonus. This means that players would no longer be able to pull the trick of declaring for the draft, and if they don't like what they get, going (back) to college. If you declare, you're in. The problem with the current system is that threatening going back to college is the only leverage that a draftee has to boost his bonus. Because his draft rights are held by one team, if he doesn't have that leverage, the team has no other competitors to bid against for his bonus. In this system, teams are bidding against each other in the bonus pool, and there's incentive to drive the price higher. Some players may be sad at where they end up, but as I'll show in a minute, it's likely that the price that they'd get is the best price that they would have gotten on the open market.

In this system, teams can decide if they want to bid big money to go after the big names or try to shop the mid-range bin and get quantity over quality. Some team may decide to blow the whole kitty on a number one pick and basically sign 19 minimum bonus college seniors with the rest. Teams are already doing a version of this strategy in that there were a huge number of college seniors drafted in the 10th round of this year's draft, which is the last round where the bonus pool held sway.

The logical thing for all 30 teams to do in this scenario is figure out which players fit their profile of risk-reward and how much they value those players. Because the highest bid will win the first (and subsequent) picks, teams will have to think strategically both about how much other teams might be willing to bid on a player, but also how to order their list. Suppose that a team figured that the highest reward-to-risk ratio was a guy whom they figured would draw a bid of only $50,000. They can't just start bidding $50,000 because it will be a long time before they win a pick and, in the meantime, other guys whom they have at higher numbers will be off the board and they'll be stuck with a bunch of money that they either won't spend or will spend just to spend it on inferior players. There's incentive to start high, particularly for the top-end talent. It's likely that only a handful of teams will be interested in each player, but it's greater than the one team that gets to offer a bonus now. This is the closest to a free-market bidding that a draftee is going to get.

In this way, teams can pursue different risk diversification strategies while maintaining cost control over their draft bonuses, the league can promote competitive balance, and draftees can have the benefits of true market competition for their bonuses. It simply requires stepping away from the underlying assumption of "everyone take your turn." I suppose that there are several ways in which this system might have flaws, but I would challenge you, reader. If the idea of the turn-taking draft weren't so ingrained into American culture and given the stated goals of a draft (allocate players and encourage competitive balance), would you prefer this system or the standard one?

Russell A. Carleton is an author of Baseball Prospectus. 
Click here to see Russell's other articles. You can contact Russell by clicking here

Related Content:  Draft,  Amateur Draft

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