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April 9, 2014

Fantasy Freestyle

Buying Low, Letting Go, and the Disposition Effect

by Jeff Quinton

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“There is no such thing as buying low” has become popular advice among the fantasy baseball community. Does the classic buy-low opportunity, in which an underperforming player gets moved for $0.50 on the dollar, really exist? Rarely. However, there are still opportunities to acquire players below their actual or true value. The disposition effect is a phenomenon of behavioral finance that shows the tendency of investors to keep their losers too long and sell their winners too quickly. In other words, when people invest in a stock that underperforms, the following story often plays out: They hold on to the stock as it continues to underperform and then either sell the stock as soon as they can make the smallest of gains or continue to hold on to the loser while missing out on more profitable investments elsewhere.

The disposition effect as it relates to fantasy baseball is thus refusing to sell low on an underperforming player and either (1) selling him as soon as you can cash him in for too small a profit or (2) continuing to hold on to the player instead of picking up or trading for better players.

1. Selling for too small a profit
When an underperforming player starts to play better, you want to make an offer to that player’s owner, giving the owner a chance to “cash out” with an offer that recognizes the player’s improved level of play. Conversely, you do not want to trade a player for a profit, when that player projects to be worth an even greater level of value. The graph below helps me explain:

A profit can be made by buying at “B,” when the player’s true value is “C.” Selling at “B” is not a rational decision, but many owners will do so because they are afraid of experiencing “A” again.

Example: In the beginning of June of last year, I was a frustrated Adam Dunn owner in an AL-only league. Not only did I keep Dunn at $11, I was watching him hit .156 through May, while cheaper first basemen like Mitch Moreland, James Loney, and Adam Lind significantly out produced the Big Donkey. So when Dunn started to turn things around in early June and I got a decent offer to sell Dunn for a younger, cheaper keeper, I was immediately tempted to make a deal. Hindsight tells us that this would have been a poor choice, especially as my team was in contention (sadly finishing second), and as Dunn went on to hit .250 with 22 HR and 58 RBI over his last 101 games. While I did not make this deal, the owner making this offer was using the disposition effect to his advantage by providing me with an opportunity to cash out on my investment.

While this is an example of a deal almost happening, deals are struck because of the disposition effect. In a trade that still stings, I cashed in Hisashi Iwakuma’s hot end of the 2012 season for Torii Hunter right before the 2013 season began. In a deal that I feel much better about, I was able to trade for Eric Hosmer midway through the 2013 season after he had rebounded from his poor start. We can see the consequences of selling a player too quickly or the profit to be had in being a buyer in that situation. Conversely, the disposition effect can cause us to keep players too long, and there are consequences to doing so. In other words, I am attempting to transition to my next point.

2) Holding on to a player too long
In a draft or an auction, we make anywhere from eight to 40 valuation decisions. We will get some of those decisions wrong. We will not want to admit that those decisions are wrong. Being wrong is a sunk cost, but humans tend to be irrational regarding sunk costs. Consequently, we will be tempted to hold onto the players we overvalued too long. Those players that we do get wrong, that we do over-draft; those players have a different graph than the previous example. That graph is below:

Here, there is no option to cash out for even original value. The risk is holding onto this player too long, when better options are available. This does not mean dropping your hitless fourth-round pick for a guy who hit three homers in the first week of the season. Even when your top selections perform below their acquisition value, there is rarely a player in the waiver pool whose true value is above even the below-expectations value of the top selections. That said, there are times when a player should be dropped or traded below acquisition value in order to acquire better available talent. It is tough to balance being overly reactive (dropping a player too quickly) and being too anchored to acquisition price (holding on to a player too long). So how do we know we are being affected by the latter? The former generally happens when we are focused on the player we are acquiring, the shiny new toy. The latter tends to happen when you do not want to admit that the player you reached for was not worth the premium price.

Example: In the AL only league from the previous example, I overpaid to acquire Tyler Flowers in the 2013 auction in order to get what I thought was a catcher that had a good shot to hit 20 homers. To make matters worse, I held onto him while other owners picked up more productive catchers from the waiver pool like Yan Gomes and Hank Conger. How can we avoid this fate? We can do so by identifying and keeping tabs on the players who we reached for in our draft or auction, and then making sure not to get overly committed to them.

Fantasy baseball players can both fall victim to and take advantage of the disposition effect. The less we can do of the former and the more we can do of the latter, the better our teams will perform. How we can do so is summarized below:

  1. Give owners who have held onto players through a rough spell a chance to cash out for a slight profit if the trade price is still below the player’s true value
  2. Do not sell players for a profit for the sake of profit (do not fall prey to another owner attempting to execute point 1 above)
  3. Holding onto a player performing below acquisition value and whose true value is below acquisition value for the sake of not being wrong only compounds the original error. Mistakes happen to every team, but the ones that ignore those mistakes will hurt themselves even more.

To conclude, be wary of how the disposition effect affects your behavior and be opportunistic about how it affects your leaguemates’ behavior.

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

Related Content:  Trades,  Fantasy,  Buying Low,  Disposition Effect

8 comments have been left for this article. (Click to hide comments)

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Tynan

Thank you for these strategy articles. It's refreshing to see fantasy baseball journalism that doesn't simply consist of bullet lists of people who hit home runs yesterday.

Apr 09, 2014 06:55 AM
rating: 4
 
Nojsztat

Just curious, would you cash in on Iwakuma now if you still owned him? I have him, and I'm getting hounded with offers. If I find a good enough one, I might just take it.

Apr 09, 2014 08:16 AM
rating: 0
 
Nojsztat

Should clarify this is a dynasty points league where I'm out to a decent start (yay SSS!) but am not truly expecting to compete for another year or two. Kyle Zimmer sounds awfully tempting...

Apr 09, 2014 08:18 AM
rating: 0
 
BP staff member Jeff Quinton
BP staff

I would not, especially if you are competing over the next two seasons (I'd be trying to buy him if I did not own him). I think Iwakuma can be a top 30 SP once he gets back from injury this year and next year.

Apr 09, 2014 09:37 AM
 
mdupske

What do you think of the simple formula for holding a player: 1 week for every $1 paid or 1 week for every round (from the bottom. i.e. week 1 for 26th round)?

Apr 09, 2014 20:51 PM
rating: 0
 
BP staff member Jeff Quinton
BP staff

It's good to have a rule of thumb, I generally use the above but not by round I take the player in but where I have them valued (I could end up with 3 guys I valued in the 3rd. The big "however" though, is that we need to be evaluating who over and undervalued, as those are the guys we will keep too long if we continue to think they are better than they actually are.

Apr 10, 2014 05:45 AM
 
cmaczkow

Apologies for the late comment...

The big problem, as always, is that if you're at any point on one of those lines in the graphs, it's much, much harder to know where it will go when you look to the right than it is to see where it's gone when you look to the left.

If you look at both of the graphs you posted, they are roughly the same general shape through about early May. How do you know when you get to point B at the beginning of June whether that will be just a spot on the incline that continues onward, or whether it will be the peak and everything is downhill going forward? Last year, I would have pegged Dunn as a candidate for the latter - older player of the sort that doesn't age well coming off a couple of very subpar seasons. I saw (and still see) no rational reason to believe it was NOT time to cash out if the opportunity arose.

Sometimes I think you should write a column that just says "It's 90% luck. Accept it and you'll have less stress."

Apr 11, 2014 13:17 PM
rating: 0
 
BP staff member Jeff Quinton
BP staff

No reason to apologize. I agree, the tough part is knowing whether a player is going to follow the path of the first graph or the second graph (I drew them up that way for this very reason). What you are getting back in a trade is definitely a factor too. What I was being offered for Dunn was not quite what he was worth (Hosmer and Iwakuma probably represent the first graph better).

Regarding your last point, I disagree. Not being able to know things with 100% certainty is frustrating, but that does not mean we should give up. Those are actually the the most important things to contemplate (certainty is easy and boring).

Regardless of whether we forecast well or poorly, we will be tempted to cash in and to hold onto our losers; and when we let that (our desire to be right/not be wrong) impact our analysis, our decision making can be hindered.

Apr 11, 2014 13:29 PM
 
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Premium Article Prospects Will Break Y... (04/08)
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