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April 2, 2012

Pebble Hunting

Mike Trout and the 20-Year Contract

by Sam Miller

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A few weeks ago, I asked this question on Twitter: If Mike Trout were willing to sign a 20-year contract with the Angels right now, what would be a fair price? The responses I got ranged from $100 million to $350 million and averaged $243 million. Glenn DuPaul did the heavy lifting to try to answer this, which is great for me, because Less Heavy Lifting is basically my entire goal in life. It’s why I went to college, and it’s why my furniture is made of Nerf. Glenn’s answer: $274 million. OK! He also wrote this, which is probably what I would have written, too, to avoid sounding like a crazy person:

No baseball team (or professional sports team for that matter) would give 20 years of guaranteed money to an athlete (the longest contract in baseball history is Todd Helton's 11-year deal with the Colorado Rockies). There is just too much risk involved. Trout's career could end early for many reasons, including injury or a lost touch with his love for the game.

This is probably the most interesting question raised in DuPaul’s piece. No team wants to give 20 years of guaranteed money to an athlete, unless the price is absolutely right. Is it possible that the price actually would be right? Is the 20-year contract, or something close to it, where baseball is going? The extensions Matt Moore and Salvador Perez signed this winter suggest it might be. Yes, these types of deals are risky. But the actual risk is far, far greater for the 22-year-old. To a team, the risk is a note appended to an actuarial table. To the kid, the risk is three decades coaching at a junior college, walking with a slight limp.

To go further, we need to agree on two things. The first is that humans are inherently risk averse, and that this risk aversion makes them behave irrationally. Here’s where the behavioral economic theory known as Prospect Theory comes in:

Imagine that you have the opportunity to play a gamble that offers a 50% chance to win $2000 and a 50% chance to lose $500. Would you play the gamble? The results reveal that only 43% of the participants were willing to play the hypothetical gamble although its expected value was much higher (+$750) than the status quo of not playing.

To an economist, this is irrational. But it’s also a delusion we’ve all agreed on. There’s a reason insurance companies are willing to sell you house insurance, after all. You’re likely to pay far more to the company than you’ll take out, and they’ll make loads of profits on your irrationality. Except you can handle one kind of loss, the $50-every-month kind. You can’t handle the other kind.

The second point is that the value of a dollar depends on the context.

[21:1] As he looked up, Jesus saw the rich putting their gifts into the temple treasury. [2] He also saw a poor widow put in two very small copper coins. [3] "I tell you the truth," he said, "this poor widow has put in more than all the others. [4] All these people gave their gifts out of their wealth; but she out of her poverty put in all she had to live on."

The richer you are, the less a dollar matters. I don’t mean this in a tax-the-rich sense, but simply in the very real way that we have certain minimum expenses to maintain a basic quality of life. The first dollars we earn go to that quality of life. The billionth dollar goes to our great-grandchildren, and the lawyers that will distribute those inheritances

So:
1. Humans fear risk.
2. The first dollar is the most valuable dollar.

Those two factors explain why the Royals’ 21-year-old catcher Salvador Perez signed away his next eight seasons for the guarantee of just $7 million, and those two factors explain most contract extensions signed by pre-arbitration players that include generous club options, including Matt Moore. Moore signed an extension this winter that guarantees him $14 million over five years and gives the Rays three club options. It’s similar to the contract Evan Longoria signed in 2008, a week after his major-league debut, perhaps the most team-friendly deal ever. Just as no team wants to give 20 years of guaranteed money to a player, no team wants to give five years of guaranteed money to a player who will play for the league minimum and a one-year commitment. And yet, the Rays—the team that can least afford to carry a sunk contract—committed this money to Moore and were pretty universally praised for it. They did it because Matt Moore fears risk, and he knows the first dollar is the most valuable dollar, and so he took a discount. R.J. Anderson:

And so, many will wonder why Moore’s agent, Matt Sosnick, would let him sign this contract—particularly in knowing that four years of arbitration could be realistic? The most obvious answer is that turning down a guaranteed $14 million is tough for any 22-year-old, even those in baseball. Moore was not a big bonus baby, either, meaning this is his first opportunity to set his family up for life. The value of security is subjective. Moore may value it higher than you or your neighbor would.

Moore will be paid about $26 million during the 2017, 2018 and 2019 seasons. PECOTA projects him to produce 8.4 WARP in that stretch. If salaries go up 5 percent per year, Moore projects to be worth more than $50 million over those three years, with the very real possibility that he becomes the sort of pitcher who can produce 8.4 WARP in a single year. And those three years are all club options, so the Rays don’t even face any additional risk beyond their $14 million. Moore gives up a best-case scenario of perhaps $125 million, all so he can guarantee he’ll earn at least $14 million. Moore is rich now, forever.

Moore, of course, has pitched 19 ⅓ big-league innings. Longoria had played six games when he signed his extension. Teams have been signing young players to extensions since at least John Hart in the 1990s, but the Longoria, Moore, and Perez extensions are unusually long and locked up players who were unusually young. This is why they work. By the time players reach arbitration, they’re already millionaires. They’re already relatively secure. They can start thinking about their great-grandchildren.

It’s notable that the Royals signed Perez and Alcides Escobar to deals that included club options, but Alex Gordon signed an extension with player options. Escobar has earned a bit more than $1 million in his career. Salvador Perez has earned less than $1 million. Gordon had earned more than $7.5 million and was guaranteed an additional $4.8 million for 2012 even before the extension. He was already richer than almost anybody you know. The Royals simply didn’t have the leverage over him that they had over Perez, or that the Rays had over Moore.

Twenty-one players this winter signed extensions that bought out free agency years. We can divide them between those who had already earned at least $5 million in their careers and those who hadn’t. Of those who had earned $5 million, only Brandon Morrow agreed to a club option. Of those who hadn’t—Nick Hundley, Jonathan Lucroy, Alcides Escobar, Matt Moore, Salvador Perez, Cameron Maybin, Dustin McGowan, Cory Luebke, Andrew McCutchen, Gio Gonzalez, Derek Holland, Ryan Vogelsong, Casey Janssen, Sergio Santos—all did. (Perkins’ figures are a little cloudy; he was right on the border of $5 million, and he agreed to a club option. Santos signed his extension the last week of the season.) The more money players already had, the less willing they were to trade their upside for security.

In general, here’s how we can look at it: when Brandon Wood buys a burrito, and they ask him whether he wants guacamole, Brandon Wood has to ask if it costs extra. Brandon Wood will always have to ask if it costs extra. If Brandon Wood had signed an Evan Longoria contract when he was a top-10 prospect, he would never have to ask if it costs extra, ever again. This is what young baseball players are risking every day before their first big payday. Guilt-free guacamole.

A player’s three pre-arbitration years are the small-market team’s most useful weapon, and leveraging those three years of uncertainty to compel middle-class kids to sign away large portions of their upside is the next way to counter big-market teams’ free agent edge. And baseball’s small markets are where new ideas incubate. It was in small-market Cleveland that the pre-arb extension was popularized. It was in small-market Oakland that the Paul DePodesta was popularized. Small-market teams have to try radical tactics on the margins, and when these tactics work, big-market teams appropriate them. The Rays and the Royals are telling us where contracts are going, and—so far, and especially in the Longoria case—it is working.

The 20-year contract might never be real. There are players for whom a long-and-early extension is probably not appealing at all. (I suspect Bryce Harper, for instance, is the sort of guy who would offer the hypothetical coin-flip scenario above, confident he would win despite the odds.)  But with the smaller signing bonuses that the new collective bargaining agreement seems to portend, longer extensions signed earlier will appeal to both team and player. I’ll be surprised when the next Mike Trout—Bubba Starling, or Francisco Lindor, or Luis Heredia—signs a 12-year extension in his rookie year. But not totally surprised.

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

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