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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.

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If David Price exercises his opt out, what are the chances that the Red Sox would get a compensation pick once he signs with another team? It seems highly likely since he would only opt out if he had been playing well enough to think he could get more money elsewhere. What is the value of that pick? This could also be a part of the equation from the team's perspective.
I view the team-mandated player opt-out as an attempt by the teams to leave themselves with options. Rationally speaking, you should want to keep open an optimal number of branches on the decision-making tree, especially when trying to predict value into the future (as these contracts obviously do). As you stated, players can decide to leave for "irrational" reasons - they would rather play closer to an ailing mother or they just want to get the heck out of your city - so teams (in this particular case, the Red Sox) will try to safeguard against this by backloading the contract. All the while, they are leaving optimal options open for themselves.
Nice article, Jeff. It seems as if the opt out always works well for the team except when they re-sign their own player to a ridiculous extension (I'm looking at you, Yankees) because the earlier years of the contract are almost always more valuable than the later ones.

Disagree, I would say the opt out always works out poorly for the team, unless the player opts out for non-rational reasons.
The Economist did some research on it. The conclusion was that more often works out good for the player and the former team. It works out poorly for the new team. Granted there aren't many data points.
I wonder too, if the team isn't thinking about their ability to prime the pump, so to speak. When the opt-out year comes along, if the player were on the fence about testing the market, perhaps the team could offer $5M or so if the player takes the opt-out option, in order to get the player gone.
I wonder if this isn't just a misinterpretation. Maybe DD wanted the opt out, assuming there would be a certain reduction the AAV of the contract. And DP did not want the opt out because of that reduction.
That's what I was thinking too. Maybe DD thinks the opt-out is worth $10mil, and he thinks Price thinks it's worth $15mil.
The other reason for the opt-out might be if the player outplays the contract and wants a raise, there's no contract squabble or hold-outs. It's bad for the team in that the opt-out gets them out of a friendly contract, but it also gets away from setting precedents to renegotiations or caving to player's demands which might adversely affect the rest of the team.
We saw this with the NFL Seahawks and Michael Bennett and Kam Chancellor; they outperformed their contract and want to renegotiate in Year 2 of a 5yr contract.
There may be one more game-theory-ish reason for this. The team does have an additional course of action if the player opts out. Let's say Price opts out because the market is higher at that point than his contract. The club still has the opportunity to re-sign at a higher value, so if they agree with the market, they still could keep Price. This does cost the club more than if there had been no opt-out, but probably not more than the potential benefit of the player opting out below market. Does that make sense?
One more reason for a team wanting a player opt out. If the player has a no-trade clause, then the team can't take advantage of the higher value the player shows during the opt out year.

If the team thinks that the free agent market isn't rational (and it often isn't), then while the player may make more money through the opt out, he still might not be worth what the Red Sox will have to pay. Player opts out, and team gets out from under an expensive contract so the Yankees or Angels can overpay for him.
Team mandated opt out gives the team the option of paying for the years they feel most confident about. If the going rate for a pitcher like Price is 7 or 8 years, then you shorten your obligation by including an opt out. The Cubs essentially signed Heyward to a 3 year deal. It's smart. Certainly Sabathia is the negative result, sort of, but that's the risk part.
Sabathia was a negative result because the Yanks resigned him. The original opt-out would have worked if the Yanks let him walk. Same with ARod.