December 27, 2016
Best of BP 2016
The Team-Mandated Player Opt-Out
With the year winding to a close, Baseball Prospectus is revisiting some of our favorite articles of the year. This was originally published on May 26, 2016.
We, as an internet, have thoroughly discussed the player opt-out, but oversaturation and (a lack of) timeliness have never stopped us before here at Tools of Ignorance and they will not stop us now. In December, at the beginning of the height of player opt-out-mania, I wrote about why this contract structure might have increased in popularity. I hypothesized, among other things, that players might be valuing the opt-out and flexibility it brings more than teams valued it, or that players were just flat out overvaluing the opt-out, or both. It felt right; it felt like it made sense.
Then word came out that David Price did not want a player option, but rather that Dave Dombrowski insisted on including one. The future, it turns out, can be a real know-it-all.
So what happened here? More importantly, why would a team insist on including a player opt-out? In theory, a contract with a player opt-out (as opposed to the same contract without a player opt-out) can only benefit the player. If the player can receive more on the open market than they can by not opting out, then the player will opt out; if not, then the player will not opt out. When put this way, this can only benefit the player. Maybe this is what Commissioner Rob Manfred was thinking about when he said, “The logic of the [player] opt-out clauses for the club escapes me.”
Dave Dombrowski and the Red Sox front office do not seem like people that do things without regard for logic, so let us take some hacks at guessing the logic behind requiring a player opt-out in David Price’s contract (or really, any contract).
Let us start by taking a crack at an assumption the commissioner and we made above: that the player will be able to accurately assess his market value come the time of the opt-out. This is an assumption from the standard model of economics that people are perfectly rational. Perfect rationality is explained by the concept of objective rationality, which, per an economics class slide, “is the notion that [people] are able to identify and assimilate all of the available information that is relevant to the problem they face, processing it such that their objective function is maximized.” Obviously, though, people make irrational and suboptimal decisions all the time. Herbert Simon, who won a Nobel Memorial Prize in Economics, coined the term bounded rationality to explain our imperfect decision making.
So what? Because people make irrational decisions, it is thus optimal when placing value on a future decision to place weight on the chance that they might make an irrational decision. In other words, because David Price might opt out when his remaining contract is worth more than his open market value, there is some value to the Red Sox of him having a player opt-out.
A small voice inside of us might now be screaming, “That is nice and all, but how can that possibly be more valuable than him not having an opt-out?” First, that is a terrific and keen question. Second, this comes down to how the Red Sox value the post opt-out portion of Price’s contract. In other words, what is the value of paying David Price $127M for his age 32-36 seasons? When factoring in opportunity cost (what the Red Sox could do with the money if they were not spending it on Price), the last four years of the contract, unless we see extreme inflation in player salaries, likely have negative value to the Red Sox. This is nothing new; we know teams overpay for the latter years of free agent contacts in order to pay market price for the prime (or close to prime) years of free agent contracts. Sure, come 2019, Price could be excellent and making the Red Sox wish they did not offer him an opt-out, but the chances of that are probably miniscule. With this we can thus formulate our guess as to the logic behind the Red Sox insisting on the player opt-out: the Red Sox likely think that it is almost guaranteed that they will be able to spend $127M in a more productive way than spending it on David Price’s age 32-36 seasons; and, consequently, any opportunity to get out of that commitment has value.
But don’t Price and his people already know all this? People are irrational, but doesn’t Price have plenty of time and resources to make sure he makes the right decision when deciding on this opt-out? Again, in theory, yes. However, we have already seen several players make the mistake of opting out below market value—Kendrys Morales, Stephen Drew, Nelson Cruz, and Ian Desmond all rejected the qualifying offer only to accept one-year deals in free agency that paid less than the qualifying offer would have. People are overconfident and overly optimistic about the future. There is, as they say, a cognitive bias for that. It’s called the optimism bias and we discussed this in the previous player opt-out article.
That said, teams do not even need players to act irrationally in order for the player opt-out to work out for them. They could also “luck out” by a player valuing something other than just future earnings. Maybe by 2019 David Price has a reason to want to play on the West Coast, or maybe he dislikes the coaching staff or his teammates, or maybe another team (or several other teams) appear more likely to win the next four years’ World Series. As a result, he would thus opt out just to get out of Boston even if it means taking a pay cut.
Originally I had planned to ask at this point if players should, given the above, refuse to accept these team mandated player opt-outs, but it sounds as if we have already answered this question (answer: no). If players value the opt-out for non-monetary reasons (whereas the team does not), then players should happily welcome the team-mandated player opt-out. If, however, they only value future earnings (which is unlikely), there is a case to be made that they should reject the offer depending, obviously—though that would necessitate admitting to themselves that they, like all of us, are at risk of making irrational decisions.
This is why, as mentioned in the previous article, I think the player opt-out is here to stay. It is worth more to one party (the player) than the other party (the team). Knowing that teams know this, and knowing that the team likely had a positive future expected value placed on the player opt-out, Price and his agent did well (if we are to believe the public details of the negotiation) to not take less for something they might conceivably value. The interesting part to then wonder about, if this were to all hold true, is how much, if anything, the Red Sox would have been willing to pay to get Price to agree to the opt-out. Probably nothing, but sometimes I still wonder.