An education in losing

A dozen years of witnessing bad business decisions has turned legions of Orioles fans into knowledgeable economists

June 14, 2010|By Steve Walters

When businesses fail, we profs show up like buzzards at roadkill. It's not that we enjoy others' suffering; our hope is to glean insights that might keep our students from producing the next Lehman Brothers, General Motors, or … Baltimore Orioles.

True, the O's aren't bankrupt, and they're not very economically important. The value of the entire U.S. sports industry is less than the federal government spent to bail out AIG a couple of years ago. But sports data are detailed and public, so it's easy to learn from them — and because we care passionately about our sports teams, the lessons learned might actually stick.

With that in mind, here are three things this year's Orioles have taught us.

First, there is a substitute for experience. It's a cherished belief in baseball that you need some old players around to "teach the kids how to win." Apparently, managers and coaches aren't quite up to this task, which requires considerable "veteran presence."

So last winter the O's acquired starting pitcher Kevin Millwood (age 35, cost $9 million), closer Mike Gonzalez (32, $12 million over two years), and infielders Miguel Tejada (36, $6 million) and Garrett Atkins (30, $4.5 million) to serve as role models for the team's younger talent.

But these old warhorses are not just having lousy years, they're having no favorable effects on the youngsters. Indeed, catcher Matt Wieters, outfielder Adam Jones, and pitchers Brad Bergesen and Brian Matusz have all regressed markedly from last season. Blame for that, however, was placed on fired manager Dave Trembley rather than the club's high-priced veteran mentors.

It's not that experience is worthless — it's just easily trumped by talent. It's worth remembering that when the O's swept the Dodgers in the 1966 World Series, their starting pitchers averaged less than 22 years old. And when Bill Gates dropped out of Harvard to form his Microsoft team, he didn't hire any gray-bearded profs to model appropriate business behavior.

Second: Beware the winner's curse. Another rationale for blowing $31.5 million on old, busted players last winter was the belief that the Orioles were ready to be respectable if certain holes were plugged. This is a classic example of what behavioral economists call "optimism bias" — the natural human tendency to base decisions on the positive bits of info that we like and to ignore the bad bits.

So when you go shopping, you have to curb your enthusiasm. The winning bidder at an auction is always the person who is most over-optimistic about the value of what's on the block — and so is cursed.

The O's not only overrated their talent base this off-season but were irrationally exuberant about their purchases. Mr. Tejada is Exhibit A. Almost every major statistical measure of his performance had been in steady decay since his career-best season in 2004. But last year, a few prominent stats — RBIs, batting average — blipped upward. Rather than dismissing this as a fluke and following the trend to its logical conclusion, the O's ignored the trend and bet on the fluke. Like those who bought mortgage-backed securities at the height of the housing bubble.

Finally, know when to hold 'em and when to fold 'em. Even if the Orioles' veteran acquisitions had met expectations, the bulk of their mega-salaries still would have been wasted. A basic economic principle is that workers are worth what they contribute to their firms' revenues. My research (with Loyola colleague John Burger) has shown that unless a team is a solid contender that appeals to "bandwagon" fans (as opposed to the "purists" who buy tickets even to see an also-ran), the marginal revenue generated by free agent players is far below their price on the open market.

Now, it would be easy to dismiss this fact by noting that O's owner Peter Angelos has money to burn. But that $31.5 million could have been used in ways that actually improved his team's chances of contending next year or thereafter. For $1.25 million less, the Cincinnati Reds signed a young Cuban pitcher named Aroldis Chapman to a six-year contract; most scouts rate him a future star.

What's more, acquiring Messrs. Millwood and Gonzalez cost cash plus young talent — a reliever named Chris Ray and a valuable second-round pick in this month's amateur draft. In other words, the Orioles' failure to read their hand objectively this year has made it harder for them to compete successfully in years to come.

No wonder O's fans are discouraged. But after 13 consecutive years of losing and countless mistakes to study, at least they are very, very knowledgeable.

Steve Walters teaches sports economics at Loyola University Maryland and has served as a consultant to two major league teams. His e-mail is swalters@loyola.edu.

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