## Tuesday, March 03, 2009

### Calculating Values with Inflation

I think Frank might have misunderstood something I wrote last month.
I've been wondering lately whether you...apply inflation strictly by the numbers when you set your bid prices, or you finesse the numbers a little bit by employing some subjective judgment about a player's worth. Based on the fact that you would limit your bid on (Dustin) Pedroia to \$31 even though inflation par says the price is \$37, I think, gives me my answer.
First of all, let me see if I can pinpoint what probably caused the confusion:
My "regular" A.L.'s inflation rate is typically 20%, so if I get Pedroia at \$30, it's a no-brainer, and probably a bit of a bargain. It's when a look at that \$31 raw bid again that I start to feel a little clammy.

Thirty-one dollars with a 20% inflation rate puts Pedroia at \$37. That sounds...wrong. Or - right or wrong - it sounds like an amount I'd never be willing to pay for Pedroia, inflation or no.
My bid limit on Pedroia was \$31 in Sportsline - a league that had no inflation since it was a start-over league. I also call this a "raw" bid limit. If I decide to keep this raw bid limit for my non-expert American League and the inflation rate is 20%, then my inflation bid limit is \$37 (\$31 * 1.2 = \$37.20).

What Frank is wondering is if I would automatically chase Pedroia to his inflation par price of \$37 because that's what I have him at on my sheet.

It is unlikely. It's rare that I'll push a player to his par price - particularly in a carry-over auction - for a couple of reasons:
• Inflation sucks the value out of your team. If I walk into the room with \$56 worth of salaries on my roster and \$100 of value I've got \$44 worth of profit to start the day. In a room with a 20% inflation rate, the \$204 I have to spend will net me \$170 worth of players if I chase everyone to par prices - or a \$270 team overall when you factor my freezes in. That might give me a money team in a very competitive league, but it's more likely to put me in 5th or 6th. If I have eight freezes in this example and can get even \$1 worth of profit on every player I buy, I'll have a \$285 team as opposed to a \$270 team. This still might not be a winner, but it will be a lot closer.
• There is a ceiling on what players can earn. Let's say that Grady Sizemore is available in my auction and my raw bid limit is \$42. He only earned \$39 last year, but I don't mind taking a small loss on a potential 40/40 player. With that 20% inflation rate, he's now a \$50 player. If I push him to par and he only earns \$39 again, I'm taking an \$11 loss. Given Grady's speed/power combo, it's possible Grady might earn \$50 but given his earnings to date it's highly unlikely.
This doesn't mean that I'll never push to inflation par or even past it in certain circumstances. If I have a great freeze list and still project out to a \$320+ team with inflation, I might push top players to their maximum price , especially if I'm strong across the board but weak in one category like saves or steals. Jose Reyes at \$55 might not make sense for all of the owners in the room, but if I've got the freezes and need the speed, then I'll take the "loss" in overall dollars to make sure I compete in the category. If Pedroia is the best 2B out there and the next best 2B is Aaron Hill, I might go to \$40 on Pedroia if I feel like I have enough value in my freeze list - or feel like there is a plethora of OF out there and am confident I'll get bargains later.

I do start out with raw bid limits that don't take my strategy or situation into account and try to rate players in a non-league specific way. This serves as a reality check, so that I don't delude myself into thinking that Reyes is a bargain because I have him at \$62 on my sheet with inflation. I want to know where I'm gaining ground and where I'm taking a loss based on each player's true worth, and not based on my specific circumstances.

But I do permit myself to stop before I reach a player's inflation par value. And unless there is a special circumstance like the ones I mentioned above, I almost always stop before I reach that full inflation bid price.

Frank said...

So, if I understand correctly, in a keeper league auction, each player has three prices:

1. Raw bid price is the price you assign to a player based on your estimate of what he is likely to produce statistically in the coming season.

2. Inflation or par price is an objective number derived at by multiplying the raw bid price by your league's inflation rate.

3. The price you'll actually pay for a player depends on a variety of circumstances particular to your team and league.

This makes sense. I had been trying to ask whether the inflation or par price could be adjusted for subjective reasons. Based on what you've written, I'd now say that it cannot. It's simply a function of your league's inflation rate. The subjective piece comes in when setting the third price: the price you're willing to pay despite what par might be.

I suppose I had been combining prices 2 and 3 in my own mind when setting my bid limits. If I thought Player A was worth \$20, and my league's inflation rate was 10%, then Player A's par price would be \$22.

But if I knew that I wasn't going to bid past \$20 for Player A, then I would adjust his inflation price (which was also my bid limit) down to \$20 and reassign that extra \$2 to another player.

Now I think I understand that by doing this, I set myself up to bid to "par" on each and every player. I run the risk of overspending early and not maximizing value.

Gypsy Soul said...

Thank you for helping me understand the inflation issue better. However, a few comments:
1. I have read opinions to the effect that it can be ok to overpay for the premium hitters because it can be considered like insurance and even though they dont return full value they do return a very large percent of the investment.
2.It is, of course, impossible really to exactly value players, so why be concerned if you overbid on players if it is just by an incremental amount? I think this is particularly true if they have upside or are fairly consistent in their returns.
3. I am just curious if you know how many dollars of profits you try to come out of the auction with in general, of course greatly effected by your keepers. Do you keep an ongoing total during the draft of your profits?

Thanks very much, Mike.

Toz said...

Thanks for the comments Frank and Gypsy. I won't speak for Mike, but I wanted to answer two specific points (one from each of you). Since Mike and I auction against each other in the AL, we're not telling any secrets out of school :)

I typically go through a two stage process in developing bids. Of course, raw bid price is an element of projections: what do you believe this player will do this year in his particular league and lineup. At this stage, however, the raw bid is subject to the "tweak"; preference, injury history, youth, etc. This will then set my raw bid. Mike may do this at part three of your analysis, Frank, but I do it here on the raw bid. I then calculate my inflation prices from there.

Gypsy, you raise an interesting question about overpaying for players. My best answer is this. The tweaking on players is done prior to the auction as part of the development of raw bids and inflation prices. So, age, productivity, personal preference, etc., has already been factored in to the price. Also recall that this is a numbers game. There are only \$3,120 in a 12 team league ... it is a finite universe. Each calculation is made with that strict budget in mind, and the bid prices you have should add up to \$3,120. You can't add or subtract money from the coffers...it is what it is (to borrow a hated euphamism). So if you overspend your bid limits somewhere, you need to subtract the money elsewhere. On top of that, you do not want to suck value out of your team by overpaying for players.