Do you like to gamble? The Seattle Mariners do. A lot. In fact, Seattle has chosen to introduce substantial risk into its relationship with Evan White this offseason, with little additional expected return. Given all of the action so far this offseason, you could be forgiven for paying little attention to this particular transaction back in November. But it’s an unusual type of deal that some analysts believe could become more common in future years, and it raises some thorny questions about financial risk management.
When I first read reports that some players were criticizing White — a 23-year-old first-base prospect who has never played above Double-A — for signing a long-term contract with the M’s, I was a little taken aback. My initial reaction to the deal had been the opposite: I couldn’t understand why the Mariners would lock themselves into paying a minimum of $24 million to a player who had never taken an at-bat in Triple-A, much less the majors, and who they would have had team control over through at least his age-29 or age-30 season (depending on when they call him up) in the absence of any long-term contract. If the Mariners simply played it year-by-year with White and he ends up being an above-average major leaguer — or even a star — they could expect to pay him somewhere in the range of $24 million through his six years of pre-arbitration and arbitration years. And if White ends up being a complete or near-complete bust (as is quite possible), the Mariners could have cut him loose while paying him a negligible sum.
And from White’s perspective, if he takes a cold, hard look at the numbers, the probability of him making less than $24 million in his career absent this contract is quite high. Some research indicates that the bust rate for hitters ranked in the bottom half of top 100 prospects and assigned an OFP of 55 on the scouting scale (as Baseball Prospectus did this offseason) is as high as 30-40%. If I’m Evan White, and I assess that there is a greater than, say, 1-in-4 chance that I end up making no more money in my baseball career, you don’t have to ask me twice to sign a contract that guarantees me somewhere between $24 and $55 million. I’m popping the champagne that night and paying for all of my friends to join me on a celebratory trip to Vegas.
But maybe that’s just me. And maybe my gut is wrong. In order to check, I decided to build a simple analytical model to help us assess this contract, and while the results do not drastically alter my negative view of it from the team’s perspective, I now think the story is more complicated than I’d understood, and it largely comes down to a question of risk tolerance. First, let’s lay out the numbers. Below are White’s salaries through the first six guaranteed years of his contract, and his salaries over the subsequent three years if the Mariners pick up all three of his team options. I’ve also included very rough estimates of what his pre-arbitration and arbitration salaries would be under a scenario in which he is a good player and one in which he is a star. One could quibble with my salary estimates, but I can tell you right now that this model is not sensitive to a few million dollars more of arbitration salaries in the out years — think of these numbers as illustrative, to give us a general sense of the risks and potential reward — for the Mariners — of this contract. Note that the contract has a $2 million buyout in his age-30 season and a $1 million buyout if the Mariners decline the option in either the age-31 or 32 seasons.
|Age||Salary ($M)||Projected Salary w/o Contract (Good)||Projected Salary w/o Contract (Star)|
The first key point in assessing the likelihood of this deal being successful for the team is that the standard of measurement is whether White generates more excess value for the Mariners under the contract scenario than he would have under the scenario where they go year-by-year for the entirety of the six seasons of team control. As you can see from the table above, given that the pre-arb and arbitration salaries are likely to be roughly equal to the guaranteed money under the contract, the Mariners are not simply betting that White will be a good MLB player. They are betting that White will be a good player in his age-30, 31, and 32 seasons… beginning seven years from now. Now, as the below analysis makes clear, in an upside scenario the Mariners could capture a lot of value in those seasons if White is a great player. They could hit the jackpot. But how on earth do you assess the likelihood of him being great seven years from now, on the wrong side of 30?
I used a simple “expected return” framework to evaluate this contract, similar to how one would assess the expected return of a financial asset. I created six potential outcomes for White’s career, including his projected WAR through nine seasons, assumed that one WAR is equivalent to $9 million (following the research of others), and calculated the total excess value to the Mariners under a “contract” scenario and a “w/o contract” scenario. I then assigned probabilities to each of the outcomes, and the model spits out a total expected return for both the contract and no-contract scenarios. See below for an illustration of one my scenarios, to which I assigned a 23% probability. In this scenario, White turns out to be an approximately average first baseman through his age 30 season, then he falls off the map. In this case, White would be slightly more valuable to the Mariners under the no contract scenario ($60 million of excess value provided) compared to the contract scenario ($57 million).
|Age season||WAR||Value||Contract ($M)||Excess Value||Projected Salary w/o Contract ($M)||Excess Value|
In addition to the above mid-level scenario (Scenario 3), I ran another scenario (Scenario 2) in which White produces the same amount of total WAR but does it over a shorter timeframe, increasing the value of the “no contract” scenario compared to the “contract” scenario. In general, the more front-loaded White’s career performance is, the less value there is to the contract, given how cheap pre-arb salaries are. It’s entirely possible (and happens often in real life) that White could produce good value over his first three or four seasons and then fall off a cliff (Travis Shaw, anyone?). The final three scenarios consist of the actual WAR numbers over nine seasons for Eric Hosmer, Mark Grace, and Freddie Freeman. When I initially constructed these scenarios, I was surprised that they resulted in relatively similar total values for the contract and no contract scenarios. I then decided to tweak the probabilities a bit so that they result in exactly equal total value, meaning that the contract has zero additional expected return compared to the no contract scenario (but a much higher variance in terms of potential outcomes). Note that I have not discounted the annual excess value figures to their present value.
|Outcome||Excess Value with Contract ($M)||Excess Value w/o Contract ($M)||Value of Contract ($M)|
|Scenario 1 (Bust, 35%)||-24||-1||-23|
|Scenario 2 (Mid-short, 15%)||66||78||-12|
|Scenario 3 (Mid-long 23%)||57||60||-3|
|Scenario 4 (Hosmer 15%)||81||67||14|
|Scenario 5 (Grace 10%)||218||151||68|
|Scenario 6 (Freeman 2%)||282||178||104|
In my view, the probabilities that I’ve assigned above are reasonable ballpark estimates. Sure, I’ve given him a 35% chance of being a bust, but I’ve also given him a 27% chance of being Eric Hosmer, Mark Grace, or Freddie Freeman! The main takeaway for me is that there is no person or projection system that could forecast — with any degree of confidence — the critical years affecting the outcome of this model; that is, White’s age-30, 31, and 32 seasons, given that he’s never even taken a major league at-bat. If you agree that my assumptions are reasonable, the Mariners fall into the category of being classic risk-lovers from the financial and economic literature. They prefer additional risk, even with little or no additional expected return. In other words, they are so titillated by the Grace and Freeman scenarios that they are willing to accept the very real risk of the bust scenario, even though they could have chosen to simply sit on their laurels and maintain a large amount of potential upside over the next six years with no downside, given the team-friendly nature of the current collective bargaining agreement. Call me old-fashioned, but I wouldn’t recommend that MLB teams become addicted to this particular gamble.
The fun thing about this model is that it can easily show the assumptions one needs to make to view this contract as a benefit to the team. Presumably, the Mariners have high confidence in their player evaluation, and they see the probability of the bust scenario as much lower than I do. And perhaps they see a higher probability of something like the Grace scenario than I do. What do you think the correct probabilities are? Let me know in the comment section, and I’ll plug them into the model.
Twins fan, DC resident, economist.