« More articles in 1   |   Go Home

Last Friday, Dave Cameron explained how FanGraphs’ value-to-dollar system works. It essentially finds the going rate, per projected win, of the past few free agent markets. This is then used to determine how much Free Agent X will likely get.

It’s interesting, much like MORP, J.C. Bradbury’s system, and others. The ‘going rate’ is an important concept, which can be used for very real purposes (dollars-per-win could be great as a gauge for the economy, or maybe ‘baseball owner confidence’). FanGraphs’ method could be particularly useful, since it is so dead simple.

But it’s important to differentiate between the going rate and actual value. There’s a concept in finance called the efficient-market hypothesis. It basically says that all stocks, bonds, and other assets are always priced correctly. I.e. the current price of a stock takes into account all available information, so there is no way to actually beat the market. If you believe this hypothesis, you essentially believe that a monkey could manage your money as well as Warren Buffett. But something tells me that if push came to shove, you would probably pick Buffett.

Buffett, among others, likes to differentiate between a company’s current price and its intrinsic value, or what it should be priced at. Market price is largely determined by speculation and emotion (the irrational). Intrinsic value is based on the company’s financial performance and growth (the less irrational).

In the same way, it’s important to differentiate a baseball player’s actual worth (or marginal revenue product) from the going rate. Even if the market is generally pricing a marginal win $4 million, a two win 3B is not universally worth $8 million. To some teams (like the Mets), he could be worth virtually nothing. To others (like the Twins), he could be worth much more. And all things being equal, a marginal win is worth much more to the Yankees than the Marlins, due to their vastly different earning potentials.

This distinction between actual value added and the market’s going rate is critically important, and it’s something we can’t forget when we evaluate deals. Every player has a different MRP for every team, and it’s impossible to determine one static dollar figure that the player is “worth.”

Feedback? Write a comment, or e-mail the author at shawn(AT)squawkingbaseball.com

9 Existing Comments

Add New Comment

  1. on January 7th at 11:08 pm
    El Guapo's Ghost said:

    Exactly! A lot of smart people disregard this fact and it is the reason why the Yankees sign the best free agents.

  2. on January 11th at 01:09 am
    dan said:

    Fangraphs has addressed this a few times. They’ve said, essentially, that these dollar values are the average of all the individual team marginal values for wins (if that makes sense).

  3. on January 12th at 11:24 pm
    Mike said:

    Yes, Dan is right. The $/win going rate they’re using is the average for all teams. All I think Shawn is saying is that the $ value changes for each team…for instance, for the Yankees it might be $10 mil/win while for the Marlins their figure may be $1 mil/win. Thus, when a team is doing a projection for a player his value be different than another team’s value of that same player. Is that what you’re saying basically?

  4. on January 12th at 11:25 pm
    Mike said:

    BTW, great blog. Just found out about it from bizofbaseball.com and I will be reading more regularly now. Keep up the good work…

  5. on January 13th at 12:22 pm
    Shawn said:

    That’s a big part of it Mike. But it’s also that each team has its own replacement level for each position. The Mets can’t get much better at 3B; the White Sox could get a lot better. So to find a player’s MRP for that specific team, you need to find the marginal wins added, multiplied by the revenue brought in by each win. Each of those figures will be drastically different for all 30 teams.

  6. on January 13th at 02:45 pm
    Mike said:

    I definietly understand what you’re saying about replacement level, and I think Tom Tango kind of accounts for teh first part (marginal wins added). For instance, 3B hit a little better overall than 2B and he uses the same position adjustment for each (the position adjustments are based on defensive performance and one conclusion he’s shown is that the positions are about equal on defense based on historical data of players switching positions, etc.), so replacement level at those two positions is different.

    There are really only 4 pools of players: IF, OF, 1B, C. To quote Tom, “The reality is that players are catchers, and if they can’t stick there, they find a home as infielders, outfielders or firstbasemen. Players are infielders, and if they can’t stick there, they move to OF or 1B. And players are outfielders, and if they can’t stick there, they move to 1B. Anyone else either plays 1B or DH. This changes the long-held belief of the defensive spectrum.”

    The replacement level pool for SS and 2B is going to be the same, so as long as we’re comparing to the right replacement level for all players of each pool they will be valued correctly in terms of marginal wins added. Then, like you said, to find their intrinsic value/MRP SPECIFIC to the Mets or the White Sox, you need to multiply by the revenue the Mets or the White Sox bring in for each win. The last part is what FanGraphs is not doing.

  7. on January 13th at 08:36 pm
    Mike said:


    The more I think about it the more I believe your replacement idea mirrors reality. Comparing players to the same replacement level does not measure the reality for an individual team.

    Lets say we’re the Dodgers. We would want to derive a MRP specific to us based on our economics, winning percentage, expectation of winning percentage, chance of making the playoffs, etc. and then compare a specific player (performance and cost) to ACTUAL replacements available, on the roster or in the market. I think you’re right in that comparing A-Rod (or any player) to replacement level (i.e., Willie Bloomquist) is not correct in reality, since that’s not how teams operate.

  8. on January 13th at 08:46 pm
    Mike said:

    Can’t edit my post, but I then assume you that you would be in favor of comparing players to a replacement level at something higher than FAT (freely available talent) because in reality most teams have options within their own system (minor leagues, etc.) that are superior to FAT.

  9. on September 5th at 12:11 pm
    rather like trying to befriend a porcupine said:

    [...] Freedom Ring: Busting the Myth of the Salary Cap - bbprospectus The Going Rate != Intrinsic Value - squawkingbaseball Willie, Bloomquist and the Dunn - joeposnanski Loyalty a Foreign Substance [...]

Pittsburgh Florist