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February 7, 2012 posted by Patrick DiCaprio

Understanding Opportunity Cost in Fantasy Baseball Auctions

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Albert Pujols, Los Angeles Angels 1B

Recently we have been getting a lot of questions from subscribers about keepers. Often times the question is something like “should I keep player X at $12 or player Y at $3?” Another is whether one should keep Albert Pujols or a similarly high-priced player at $38 in an “only” league.

These questions all come down to two things: the owner is either risk-averse or does not understand opportunity cost.

Understanding opportunity cost is by far the most important skill for the keeper league player. If you do not understand how to navigate the river of keepers on the raft of opportunity cost you will not be able to sustain a string of successful seasons in any keeper league that has reasonably good players in it.

Here is the best general rule: when making tough decisions always come down on the side of having more money at the draft. If you are in the type of league that allows you to over-auction into your reserve roster so much the better; in that case you should do every trade you can to free up money and not worry too much about the players going back and forth.

Inflation—Every keeper league has draft inflation. The league that allows you to over-auction into the reserve roster minimizes inflation. But let’s understand what we are talking about. Draft inflation is not the case of people overpaying for players.

When we discuss draft inflation we are talking about the fact that more value is being retained on roster than the cost of those players. If a league has $500 of value being kept but the total cost of that $500 is only $200 then you have draft inflation. The cost to obtain players in the draft goes up because more of the value is kept but the cost of that value is not proportionate.

Having more money at the draft is important to any team with aspirations at winning. If you believe your team to be a contender in a keeper league then every close decision is made with having more money at the draft as the prime concern. Just as a personal example, my team in my high-stakes keeper league has a few $1 and $2 players that can be extended (names are omitted to protect the innocent). We are extending none, because we are contenders looking to repeat as champions.

Risk Aversion—Inherent in the questions is the fact that the owner fears that he will not be able to extract the same value during the auction.

But it is not value we are after but profit, unless your keeper roster is so strong that you only need to get fair value from dollars at the auction. This happens on occasion. If you have a very strong keeper roster at a very low cost, then you should keep other pricey players that may not return profit. As long as they rate to earn their salary and nothing more they become keepable.

But most times this is not the case. If it is not, your goal is to extract as much profit as possible. You do not do this by keeping Albert Pujols at $38. You can, with virtual certainty get more profit from that $38 in the auction than you can by keeping him. And if you cannot, perhaps your fantasy baseball auction skill needs some help (which we are happy to provide by the way).

Opportunity cost—You are not just paying $38 for Pujols. You are losing a chance at far greater profit. How much?

Let’s assume that he will produce a $40 season. So you profit $2, or 5%. Not too shabby in reality. Instead now let’s buy four $10 players, and assign values to them:

Player 1—cost $10 production $16

Player 2—cost $10, production $0

Player 2—cost $10, production $12

Player 4—cost $10, production $7

This seems like a reasonable range of outcomes on the low side. Here you have spent $40 and gained $35 for a loss of $5. Terrible results to be sure.

What if we spend $40 on a $20 player and four flyers at $5, and we will assume the $20 player returns fair value. In this example the four flyers return the following:

Player 1—cost $5, production $2

Player 2—cost $5, production $20

Player 3—cost $5, production $7

Player 4—cost $5, production $1

Is this reasonable? Of course it is, at least if you take our advice. Hitting a home run like this happens for good players virtually every year, and often more than once in a year. Now you have spent $40 and profited $10.

Assuming these rough calculations are true you only need to hit that home run one time in five to make it better to save the money. If you are risk-averse then you won’t want to take that chance, costing yourself dearly in the long run. If you do not think you can accomplish this, then try this relatively common scenario: spend that $5 on four backup closers and see how often you hit that home run; I will bet it is more than one in five. 

Every auction, no matter how many keepers there are, presents opportunities for huge profit. You just have to be there to take advantage. You can’t do that if you are keeping $40 players.

 

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