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March 31, 2014

The Miguel Cabrera Extension

Sunk Costs, Mental Accounting, and an Overpay

by Jeff Quinton


There is a lot we do not know about the decision to give Miguel Cabrera his new, enormous contract extension. There is a lot we will never know about it. There are factors that might or might not have factored into the decision. We could say that this has been the plan all along. We could say that at this juncture, this is what the Tigers thought was best for the franchise or that this what the Tigers thought was the best allocation of their resources. People will also say that the Tigers may have done this to justify the Doug Fister trade and/or to justify not extending Max Scherzer. People will probably respond to this by saying that maybe the plan was to extend either Scherzer or Cabrera, or both. People will say a lot of things about a person getting paid that much money to play baseball.

Again, we were not in the room (this is an assumption I am boldly making) and we do not know what Dave Dombrowski or Mike Ilitch were thinking. As individuals, I have no idea how either of them usually thinks in these situations. What we do know is how people think; we know how most people think. Consequently, there are some behavioral economic factors that are related to how people might think if in they were in the same situation as the Tigers’ leadership. In other words, the below is not about how the decision was made, but rather about how decisions are often made.

Sunk Costs: The difference between a loss and a cost
Whether we view something as a cost or a loss has a large effect on how we make decisions. Here is an example I have stolen from my behavioral economics class:

Imagine that you purchased two very good (and expensive) tickets to a concert one week ago, but there is a big snowstorm. Traffic promises to be terrible and the road conditions will probably be unsafe. If you hadn’t already purchased the tickets, you definitely wouldn’t do so now. Would you go?

Most people would go to the concert. They would do so because they do not want to lose the money they have spent on the ticket. If we say that this is not a loss of let us say $600, but rather a cost of $600 for living in the northeast and being able to secure the tickets ahead of time, people would probably be less likely to go. Either way, we face a net negative of $600, but whether we view it as a loss or a cost can make a difference in our behavior.

This brings us back to trading away Doug Fister and not extending Max Scherzer. For now, let us assume that Fister’s lat strain is just lat strain. The Tigers had six capable starters, a barren farm system, and a Cy Young Award winner due for an extension. Instead of trading away a cheaper, less productive starter like Rick orcello or Drew Smyly, the Tigers traded away Doug Fister. Again, we will assume this option was chosen as a way to make room for a salary extension for Max Scherzer given the press release and the subsequent Cabrera extension. Let us put this into example form:

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The Week in Quotes: Ma... (03/31)
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