“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.