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April 9, 2014

Fantasy Freestyle

Buying Low, Letting Go, and the Disposition Effect

by Jeff Quinton


“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.

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

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<< Previous Article
Premium Article Prospects Will Break Y... (04/08)
<< Previous Column
Fantasy Article Fantasy Freestyle: Hom... (04/07)
Next Column >>
Fantasy Article Fantasy Freestyle: Sma... (04/09)
Next Article >>
Fantasy Article Fantasy Freestyle: Sma... (04/09)

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