Valuing Major Leaguers
How do we calculate these values?
We have found that, for the most part, MLB trades are based on the concept of surplus value. That's the difference between the player's "field value" and their salary. Let’s dive into that a bit.
Calculating “field value”
Field value, as the name implies, is an estimate of how much that player is worth on the field. The easiest way to think about it is: what would this player be worth in free agency?
First, there’s been a lot of research on how much a team pays for each win above replacement. On average, it’s a little above $9M. But we also noticed that’s not consistent. A DH, for example, doesn’t get paid that rate because he doesn’t play defense. Starting pitchers, we’ve noticed, get a bit more.
In our modeling, we’ve found that there isn’t one true projection system available that accurately matches what the teams are using. So we played around with our own combinations of statistics, using our own formulas and algorithms, until we found consistent correlations to real-life transactions. We consider this part of our story proprietary, so we’ll leave it at that.
Inflation also plays a role, and this matters when forecasting dollars-per-WAR estimates. In general, our projections track the general rate in the US economy. As a check, we track the rate that MLB uses to apply to qualifying offers each year.
Years of Control
When you trade for a player, you’re not getting that player for an open-ended timeframe. You’re getting him for a finite number of years. At the beginning of a player’s career, teams have them for six years (in most cases) — the first three at league minimum salary or slightly above, and the next three at arbitration cost, which typically increases each year and depends on their performance.
This is a big one. In case you haven’t noticed, baseball players get injured. A lot. Some are minor, some major, some catastrophic. We noticed that many popular projection systems do not properly account for this (they do account for it a little, baked into playing time estimates, but not nearly enough, in our view).
Mind you, we’re not doctors or insurance actuaries. But we know this is a thing that baseball front offices care about a great deal, so much so that they’ve baked in a significant margin of safety in their valuations, which appears in the on-paper gap you might see between a projection system’s WAR estimate and the contract the player received.
So we’ve tried to approximate that amount, which tends to vary both by position and player. In this area, the riskiest players are starting pitchers. And we also know that as players get older, their injury risk increases – and it’s not a straight line. The risk adjustment just gets bigger and bigger each year.
When a player is out of options, it significantly impacts his trade value. Often, these are the first players a team looks to designate for assignment, because these players have no roster flexibility. They take up a roster spot that could potentially be given to someone else who’s better. It means the trading team has less leverage.
By the same token, teams value the flexibility of being able to move players up and down from MLB to AAA, because of the added depth it gives them.
So players who are out of options carry what we call roster risk, which is a negative adjustment to their field value. We apply a discount for players with that status. (Note that this is only true of players who are marginal – typically somewhere just above replacement value; stars or above-average regulars don’t have this risk.)
Most salaries are publicly available on multiple websites. Simple, right? Not always. Quite often, we have to estimate it beyond the current year. A veteran player may have a contract that includes a team option. In that case, we have to estimate whether the team is likely to pick up that option or not. If the projection is negative, we assume the team would not, and therefore don’t include it in our valuation (although we do include it in our Years of Control stat).
For players with less than six years of service time, we estimate their arbitration costs based on the 25/40/60 model. That is, for their first year of arbitration, they are likely to earn about 25% of their projected market value, then 40% of that in their second arb year, and 60% in their third. (Note: The Point of Pittsburgh study linked here is the most recent and, we believe, the most accurate of the estimate models.) As noted above, we don’t calculate negative-value years in our estimates.
Finally, we assume that player salaries do not decline in arbitration years. The arbitration system is based on giving raises, not pay cuts. We also found that there seems to be an unspoken minimum salary for first-year arb players of around $800K. So if they’re projected to produce less than that in their first arb year, we assume for our purposes they would be non-tendered. If they’re projected to produce less than 40% of their market value in their second year, and/or 60% in their third arb year, we also make the same assumption. (We’ve noticed a lot more players are being non-tendered than in previous years, likely due to teams getting smarter about valuation projections.)
So, after factoring in all of the above, we base it on a simple formula:
Adjusted field value – salary = surplus value
That surplus value is the default estimate, and it’s commonly referred to simply as “trade value” in the media and among baseball experts. But there’s one more adjustment we need to make at this point.
Because there are only 30 teams, when it comes to transactions, major league baseball is considered a closed market. It’s not as efficient or as liquid as other types of open markets. So there’s a wider variance of outcomes – especially in the trade market, where it’s sometimes difficult to find a trade partner for a certain player.
It also means that imbalances of supply and demand tend to be magnified. Good relief pitchers are always in demand at the trade deadline, because they tend to be in short supply. 2Bs are often discounted because there is generally an oversupply of them relative to the market.
Further, you’ll notice in our trade simulator and team rosters that we indicate “availability,” which is our estimate of the likelihood that a given player would be moved by his team. To be sure, there is some subjectivity here, but it is informed by our continuous reading of the markets.
So we keep an eye on those trends and adjust accordingly. That is why, in our estimates, we provide a low, median and high range.
Except… in the summer
The summer trading deadline is its own animal. In the winter, the factors we mentioned above are relatively stable, because more teams are open to making roster improvements. There’s less of a distinction between buyers and sellers.
It’s also true that in the winter, teams can augment their roster by simply paying market rate for free agents, meaning there are two avenues for roster improvements.
But in June and July, the only option for upgrades is the trade market, which is why it can get a bit distorted. Contending teams start to separate from non-contending teams, resulting in clearer cases of buyers and sellers. The buyers start looking for short-term improvements to carry them into a potential playoff run, while sellers look to trade current quality players whose team control period is running out in exchange for prospects to help their team in the future.
To adjust for that, we apply one last look at the market at the summer deadline to see what types of players will be more in demand than others. It’s a given that pitchers – both starters and relievers – are in demand. That’s always the case. But position players are more variable, and the summer market for them depends more on the needs of the buyers than the wants of the sellers.
Overall, this is a probabilistic model. That means nothing here is absolute, but rather, a best guess based on the data available to us. We believe that’s the way MLB front offices view their transactional decisions as well. “You’re placing bets,” Yankees GM Brian Cashman told The Athletic. “And there are risks to every bet. It’s like investments. There is no such thing as a 100 percent guaranteed return on your investment.”
Questions? Contact us.