Baseball and Risk: 2020 Edition

Hello all, it is your favorite friend with questionable character. Today I wanted to write about risk in baseball. Risk, as defined by Merriam-Webster is defined as both a noun and a verb. The noun definition is the possibility of loss or injury, while the verb definition is to expose to hazard or danger. I find this area fascinating since it plays into what I do for my day job. I work in a position where I am paid to look at risks and the controls put in place to minimize, or mitigate, them, particularly around IT systems and integrations. The current situation with MLB, really all sports, is a fascinating case study to me. And with that AWAY WE GO.

Costanza Risk Management

Major League Baseball is facing an unprecedented risk profile. This profile has not only to do with the COVID-19 pandemic but also the business model for teams and players. I am working under the assumption that team owners are going to use this as a way to reset their business model. I am not covering whether or not them crying poor is appropriate. I do not think it is, because they refuse to make their books and financial statements available.

When I mentioned this to the three wise men (aka Beefloaf, Chorizy, and MSS: FromThe108) I had originally started out looking at the case of J.D. Martinez. As everyone knows he decided to stay with Boston in November of last year. Now this decision looks like a stroke of genius but I believe the reason for the decision is what is going to hurt him in the long run, even though the hypothesis that he and his agent, Scott Boras, were working under came true. I believe he decided to stay in Boston because he, under guidance from Scott Boras, believed that the universal DH was going to be implemented. With the implementation of this, his market would dramatically increase from solely AL teams to all teams. I am not saying all teams would have entered the bidding but there probably would have been a larger pool of teams bidding for his services. I admit the day job is seeping into this because you need to look at the risk factors in the decision he made. I believe the risk factors considered in the decision included:

  1. Performance
  2. Health
  3. Expanding market, due to the universal DH
  4. Contracts available to him after the 2019 season
  5. Another opt-out clause after the 2020 season
Costanza Risk Management

In looking at these he definitely believed that his performance would remain consistent, he would stay healthy, the money to match was he was currently making wasn’t there after the 2019 season, he had another opt-out after the 2020 season, and the pool of teams would increase. Fast forward to today’s announcement about the universal DH being rolled out to all of baseball for the 2020 and 2021 season, pending agreement between MLB and the Players Union. In my opinion he made the right call based on looking at his risk profile at that point in time. The reality is that he will never see that kind of contract again, because while the pool of teams has indeed increased the pandemic, according to the owners, has put a major dent in their business model, again I am not rendering an opinion on this ESPECIALLY without seeing what team financials look like. That is the tricky thing about risk. You may make the right decision at the time, but that does not mean it will be the right decision six (6) months down the road. Granted, no one could have predicted a global pandemic. He made the right call, but as with anything factors can change quickly and dramatically and that is the beauty, and danger, of risk.

I had originally intended to focus only on Martinez, but the risk question got me thinking about all of Free Agency.

Costanza Risk Management - Ovaltine

First off, I would say anyone that has an opt-out would be monumentally stupid to exercise it because they probably wouldn’t get anything near what they are currently making. I also believe a player like Manny Machado, who has an opt-out after his 5th year in San Diego, would refuse to exercise it if asked today. This of course may change in another four (4) years but based on what we are seeing I believe the owners are using this as a way to reset their business model. Do not be surprised to hear the word collusion in a couple of years. Second, guys like Mookie Betts will NEVER see the money that they turned down before going to free agency. I believe the era of the $30 Million-dollar contract is gone for quite a while. I believe it will return, but not for many years. Teams will not want to take the risk of a commitment like that, in both years and dollars, on their books in this environment.

Feel free to agree or tell me I am crazy; you are probably right on both!

-Aloha Mr. Hand

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