Lazarito Armenteros, Arbitrary Coherence, and the Vanity of Amateur Competitive Balance

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Lazarito Armenteros, Arbitrary Coherence, and the Vanity of Amateur Competitive Balance

It’s reported that 16-year-old Lazarito Armenteros will soon receive a signing bonus in the $15-20 million range.

In his book Predictably Irrational, distinguished behavioral economist Dan Ariely maps the mechanisms which consistently steer us away from the human tendency of rational behavior and towards choices which are objectively irrational or sub-optimal to our interests.

One of those mechanisms is the concept of arbitrary coherence: a long-term anchoring effect where the initial imprint of prices given to a new market or item has long-term implications on that commodity’s relative perceived value, even if those prices have no basis in reality.

As an example, Ariely details the market history of black pearls: a little-known, little-cared-for, and therefore wholly unsaleable item for the first producers to offer them. Though instead of taking a standard action—beginning to offer the pearls to wholesalers at a high discount, or bundled with other more-desired pearls—they managed to convince a noted high-end Fifth Avenue jeweler to display the pearls in his window at an outrageously high (and of course, completely invented) price. Seeing the previously-unknown item being priced in the same manner as diamonds, emeralds, and rubies sent a message about their value, and the message was “sticky” because this was the first time consumers were widely exposed to this item. Tahitian black pearls were soon on the necks of Manhattan socialites, and most importantly for this discussion, a completely fabricated, arbitrary price established a lasting benchmark of value. Our behavior from then on was “coherent” to this initial arbitrary construct.

Consider arbitrary coherence in the context of the expected prices listed for Lazarito Armenteros.

How much money would Lazarito get if he were Dominican or Venezuelan instead of Cuban?

As mentioned, he’s expected to get a bonus in the $15-20 million range. Jim Bowden claims it could reach $25-30m. He’s 16 years old, has no performance record whatsoever. For all practical purposes, he’s in the same boat as any other international free agent his age. The record for largest signing bonus for an international free agent of this age is Nomar Mazara’s $4.95 million.

Sure, perhaps there’s inflation to consider. But are we really supposed to believe that Lazarito’s expected talent is roughly triple, or perhaps as much as six times higher, than the expected value of any other 16-year-old international player? Any 16-year-old international player ever?

That would be really hard to buy under any circumstances. But perhaps especially because no one even actually seems to be making that claim about Lazarito’s talent. People are certainly glowing about Lazarito, saying he has exceptional tools and blue-chip potential. Similar things were said about Miguel Sano, Wily Mo Pena, Michael Ynoa, and others. Similar things are said about one or two amateur free agents each season, or at least every couple of seasons. And yet no player in that age bracket has ever signed for more than $5m.

Lazarito is not the only example of this phenomenon; he’s not even the only example from the current international signing period. The record signing bonus for a non-Cuban international amateur free agent of any age is the $6 million the Giants gave to Lucius Fox (age 18, from the Bahamas, with Florida high school experience) last July 2. A few months later, however, the Dodgers gave the same amount to 17-year-old Cuban 2B Omar Estevez, about whom Ben Badler of Baseball America wrote the following:

At around 5-foot-11, 185 pounds, Estevez stands out more for his solid fundamental play than his tools. He’s not particularly athletic or flashy and nothing grades out as plus, with fair bat speed and gap power but a good approach from the right side of the plate and a high baseball IQ.

“Estevez was kind of under the radar tools-wise, but he can hit,” said one scout. “It’s playable defense and he’s not the most agile guy to be in the middle of the diamond, but he has a polished bat. It’s not an athletic body, it’s not what you get excited about, but the way he recognizes pitches, his approach—you don’t see a lot of kids his age doing that.”

That’s right: a Cuban 2B with an unathletic body and no plus tools received a signing bonus equal to that of the highest bonus ever given to a non-Cuban in the same general age range. In this context, it’s easier to understand the reports of a  $15-20 million price range for Lazarito, who is by all accounts a far better prospect than Estevez. The figures reported for Lazarito are consistent with those given to other Cubans; the issue is that the price for Cubans is far higher than the price for similarly talented players of other nationalities.

So why is this taking place? Why are teams paying a “Cuban premium” that seems to be paying Lazarito three times higher literally just for the sake of his Cuban-ness? To what imprint are they anchoring, and according to what yardstick of value are they acting?

Clearly, Lazarito is being identified as a “Cuban amateur free agent” instead of a standard “amateur free agent.” Of course nothing about his Cuban-ness means we should expect him to be better than any Dominican or Venezuelan amateur free agent ever—at least, certainly not three or four times better.

The modern market for Cuban amateur(ish) talent didn’t begin until 2009. After a long period without a significant Cuban defector, several significant players came into play (who weren’t considered immediate MLB talents) in short order. Notably, Adeiny Hechevarria, Dayan Viciedo, and Jose Iglesias.

These players were a bit of a curveball to the market. With no useful performance record and limited scouting background, their present value wasn’t clear. Doubts even existed about their actual ages. As 19 to 21 year-olds, they weren’t standard international free agents—teenage ‘tools’ packages—nor were they Major League free agents with a clear present value. Grasping for how to value these players, teams kind of split the difference. The contracts, perhaps unsurprisingly, wound up being very similar. Viciedo signed a 4-year, $10m contract around the start of 2009. Later that year, Iglesias signed for 4/$8.25m. Hechevarria signed in the spring of 2010 for 4/$10m. (Certainly coherent pricing, no?)

Over the next two years, no significant prospect defector signings took place. Cespedes signed, but that was a well-established star. Leonys Martin was seen as more of a present value than a prospect, and was 23 when he signed a deal for 5/$15.5m. Aroldis Chapman signed for 6/$30.5m after having established himself as arguably thetop pitcher in Cuba; like Martin, despite his youth, he was seen as an essentially-immediate contributor, and was assigned directly to AAA before reachingthe majors in his first season in affiliated ball.

Enter 2012. Jorge Soler and Yasiel Puig are the new Iglesias and Viciedo. And, just days apart, they sign contracts that set a completely new standard for Cuban amateur free agents.

Soler, 20, went for 9/$30m. Puig, 21, for 7/$42m.

Why did this happen? Why were their values so incredibly high? At the time, the Hechavarria/Viciedo/Iglesias signings would have appeared neither great nor awful. Cespedes may have had some effect, but he was only months into his first MLB season, he had signed for a total of $36m (meaningfully less total value than the $42m Puig received), and he was considered to be a much more known and desirable commodity.

And sure, Soler and Puig were probably considered superior talents at the time to the 2009-2010 signees (though that’s certainly at least arguable). But at signing time, neither of these players were considered generational talents of any sort. Read Ben Badler’s reaction to the Puig signing in 2012, in Baseball America:

The Dodgers appear to have made a statement with an expensive Cuban signing, but the message they sent across baseball has mostly elicited the same response:

What are the Dodgers thinking?

A source confirmed that the Dodgers have signed Cuban outfielder Yasiel Puig, and according to multiple stories, first reported by ESPN Deportes, they gave him a seven-year, $42 million major league contract.

The question around baseball is how the Dodgers could justify awarding such a lavish contract to a player who scouts considered more of a solid than a spectacular prospect. Puig hasn’t played in a year, and aside from a light series of workouts last weekend that were more notable for a circus atmosphere than anything else, he hasn’t been seen (legally) by American scouts since June 2011.”

So why the heck did these contracts happen?

From MLB.com, announcing Puig’s signing on June 29th, 2012:

Puig (pronounced Pweeg) was declared a free agent Wednesday, not long after establishing temporary residency in Mexico, and was eventually cleared by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC).

In order to avoid being subject to new CBA guidelines that will limit spending on international prospects to $2.9 million per team without penalty, Puig has to sign, have the contract approved by Major League Baseball and pass a physical before Monday’s deadline.

And ESPN.com, covering Soler’s signing on the next day:

As of Monday, the maximum that can be given out for international signings is $2.9 million, per terms of the newest collective bargaining agreement. Soler’s deal, which was agreed upon earlier this month, would have been null and void if it wasn’t signed by Sunday.

Ohhhh, that’s right.

Puig and Soler signed contracts that completely demolished the previous standards for Cuban amateur free agents, not because they were thought to be many times better than similarly-situated players, but primarily because teams thought this was their last chance to openly grab such talents.

As any economist will tell you, the perception of scarcity can drive a market through the roof. It seems uncontentious to point out that’s what took place here.

As a result, now, since $42m or $30m is the price you pay for a 20 or 21-year-old top Cuban prospect… well, $15-$20m seems like a reasonably fair price to pay for the top 16-year-old Cuban prospect.

We’re anchored now, we’re conditioned. And this is why that’s happened. We’re adhering to this previous suggestion of value. We’re paying this player three to five times more than we might if he lived on the other island, a few hundred miles away? No one, when faced with that question, would actually claim it makes any justifiable sense in the current marketplace. It’s just simply what we feel like these items cost.

It’s of course awfully ironic that right now, MLB is preparing a plan which will attempt to control and restrict this type of amateur spending within the new CBA. Their prior attempt to do so bears a heavy responsibility in its creation.

And, consistent with the theory of arbitrary coherence, it’s a bell that really can’t be un-rung. By attempting to artificially manipulate and control prices, MLB created an artificial standard which set perceived value far higher than it had settled upon naturally. The market will likely adhere to this newly established price level for a long time, consciously or not (more than likely, not).

Further attempts at control or manipulation are once again likely to create unexpected outcomes with potentially damaging results.

 

Behaviors Accidentally Made Rational

We’re in the midst of some unforeseen circumstances right now. Lourdes Gurriel may sit out an entire season to skirt the current CBA restrictions imposed on teams who may sign him. The rules are effectively offering him tens of millions of extra dollars to not play baseball this year (at least, MLB-affiliated baseball), and sit out until he turns 23 in October and skirts amateur spending caps. That’s certainly defensible as a rational behavior on the part of Gurriel, given the rules and penalties imposed by the CBA’s architecture. (Imposed upon the team, ostensibly… but as we see in this example as well as the cases of free agents like Ian Desmond and Dexter Fowler, paid ultimately by the players).

There’s another newly-rational behavior.

The Los Angeles Dodgers have been paying what anyone would consider completely absurd prices to anything that moves lately in the international free agent market, Cubans prominently included. So they’re just blindly paying into this mystical Cuban premium as well, no?

Well, no. When the mega-market Dodgers behave this way, it’s actually not irrational.

Remember, structures have been designed for the exact purpose of limiting a team’s ability to dominate their competitors economically. Severe penalties are imposed on the Dodgers if they violate their threshold for MLB spending. Restrictions (with penalties) are placed on the Dodgers for draft spending. Penalties and restrictions exist for the Dodgers on international spending, as well.

Perhaps, then, the answer is just that we make the international restrictions even more burdensome, so that it’s not worth it for the Dodgers to “cheat” here. An international draft, perhaps, with restrictions that are in sum even more distasteful to the Dodgers than those in the domestic draft.

Well, that’s not going to work the way you want it to. First and foremost, because that will merely shift the location of the Dodgers’ excesses rather than eliminating them.

Just consider the sheer scope of their excesses this year. They were assigned $700k for their international signing bonus pool in 2015. They went over that cap just slightly, spending $44 million on international amateur free agents this year. Since they pay a 100% tax on the overages, the Dodgers actually paid $88m for these prospects. And we told them they were only allowed to spend 700k.

The Dodgers are going to attempt to economically dominate their opposition one way or another, and the only question as far as they’re concerned is where the penalties will be the least costly to them. They’ll apply their resources in whichever of the available channels seems least threatening to their interests. But the operating principle, to which the Dodgers have demonstrated their understanding most distinctly via spending a further combined $100m this year on the likes of Hector Olivera, Yasiel Sierra and Pablo Fernandez, who are neither prospects nor clearly decent MLB players, is this:

$100m, invested horrendously and imprudently, will still buy more talent and wins (present or future) than $100m not spent at all.

And this is not constrained to a decision of the Dodgers. The Dodgers’ behavior—only rational to teams of such means, likely not rational for a team who isn’t spending-capped elsewhere—of course drives up the market for all other teams.

Okay, perhaps then we must be extreme to prevent this market domination. Let’s make a generous assumption: that a CBA somehow could get ratified that would make all penalties equally devastating, such that they’d never be crossed. Payrolls above the luxury tax threshold are taxed at 1,000% of overage, an international draft is imposed alongside the domestic draft, and let’s say the international pools are twice as large as the present $2-5m in each team’s annual international pool. But, any overages in either the draft or international pools result in the loss of the ability to draft or sign any amateur players at all for the next five years. In a world where the Dodgers are willing to forfeit future ability to sign players, and also throw $88m (plus another ~$100m on Olivera, Sierra, and Fernandez) for a single year worth of international spending, it’s still questionable whether penalties so absurdly steep (which would, mind you, have no actual chance for ratification in the new CBA) would even suffice.

But, let’s presume those penalties are sufficient. Effectively, this means we have a hard cap everywhere. Problem solved, right?

Sorry. To this point, we’ve withheld the most interesting anecdote yet from our 16-year-old Lazarito, via Bob Nightengale:

Armenteros […] already has a Japanese team willing to pay him about $15 million to come play in the Nippon League.

There it is. Even if, against all odds, a system was introduced that would ensure no MLB team ever spent more than $5m or $10m on an international amateur free agent, that would only succeed in ensuring it was a non-MLB team who buys the rights to the player.

Try as one can to control, to manipulate, to restrict… the bottom line is, values have a way of expressing themselves. Even though MLB has a near-monopoly on the best baseball talent, monopolies are simply very hard to enforce for this exact reason; if the values are artificially manipulated too flagrantly, the incentives for alternative solutions are raised almost proportionately.

Forget Japan, or even Korea. It’s not actually too hard to envision an enterprising group of American entrepreneurs offering a higher price for these talents than MLB teams, and figuring out a way to capitalize upon them, if the prices are artificially set too low (and thereby returning to some form of minor league independence, as existed earlier in the 20th century).

 

Then, What?

It’s not generally our expertise, nor our interest, to pontificate on this topic. But if we’ve come this far, perhaps it’s incumbent upon us to offer an alternative.

The resource gap in MLB is large. Steps almost certainly must be taken to reduce the ability of mega-market teams to economically dominate their opponents. However, we face two main issues:

–Attempts at price controls can alter the market in unforeseen and potentially dramatically damaging ways. We’re living that out right now. Those alterations can not only be very costly in the financial sense, but in how they disrupt the flow of talent—Lourdes Gurriel sitting out, major international free agents choosing non-MLB markets, or perhaps other issues.

— Attempts at price controls don’t actually keep the mega-markets from throwing their weight around. At all, apparently. In fact, on the international side, it’s made a problem which really didn’t exist before much, much worse. At best, it perhaps alters the channels that mega-market teams choose to dominate their opponents. The Dodgers’ incentive to spend somewhere, anywhere remains.

Further, any mechanisms used to achieve these means are clumsy, unwieldy, and rigid enough to be breakable. What happens when the next 18 year-old Shohei Otani (or other Asian amateur) becomes available? What exactly qualifies a player as an amateur versus a foreign professional? What will keep players and teams from manipulating their place on that spectrum? What happens when a team figures out creative ways to compensate players which technically avoid bonus rules, fully or partially? What is the fairest way to figure out the allocation of bonus resources to each team? What happens if you sign a 20 year old Cuban to a Major League contract; what portion of his salary should count against your bonus pool?

There is no way to write the rules so that all potential contingencies and idiosyncrasies can be covered, which creates no large unforeseen disruptions, and does not have the potential for manipulation.

It’s not a matter of figuring out the right rules to write. The rules that will perfectly handle any situation do not exist.

It’s only about outcomes, and finding the most effective ones. Simple solutions are easier to adjudicate, and their relative success or failure is more transparent.

Forgetting about an international draft may avoid many problems. Forgetting about bonus pools, too. Forgetting about compensatory draft picks and qualifying offers does, as well. Forgetting about what qualifies as amateur versus non-amateur spending might be the largest payoff of all.

 

The mechanism to prevent the economic domination of the mega-market teams must involve shifting their incentives. Right now, it’s perfectly fine for them to set $100m on fire if it gets them just a bit of talent in return. Changing the nature of this incentive is the only long-term option for reining in their behavior.

Right now, amateur overages—of which the Dodgers alone have accrued scores of millions—go to an MLB fund for international baseball development. MLB likely never imagined this department would be so well funded. But those funds don’t work against the Dodgers interests, outside of the loss of capital (which they couldn’t spend very effectively elsewhere, either).

The way to shift this incentive is to send the Dodgers’ overages to their competitors. This way, the more the Dodgers spend, the more they subsidize their competition. Now, their spending will be bounded; it will only be rational to outspend their competitors to the extent that their spending produces more talent than their competitors will be able to procure with their new resources.

As for the mechanisms by which this may be achieved: rather than the tangled web of regulations and penalties (qualifying offers, bonus slot allotment, definitions of amateur player versus foreign professional, etc) which attempt to create balanced outcomes… what if, simply, all player spending (domestic, amateur, MLB) was lumped together, and teams who spent more than the average team had to be taxed on those overages of that average. And the tax proceeds were distributed to the teams who spent less than average. Let’s say, all spending above the average of the other 29 teams would be taxed at 30% of its value, just to throw out a number.

We’d need some very simple guidelines. Multi-year contracts would be counted toward a team’s yearly spending total at their average annual value (5 years/$100m simply counts as $20m per annum, regardless of the actual distribution of annual payouts). Signing bonuses for amateur players would count on the books of the current calendar year.

Now, if the Dodgers spend $400m on player talent this year, and the average team spends $150m…. 30% of their overage (400m – 150m = 250m * 30% = 75m) goes directly towards subsidizing their competitors.

Incentive, changed.

There are reasons this may or may not work. From the teams’ perspective:

–It may or may not make total spending any greater than it is now. That isn’t entirely clear. It’s not a salary cap, merely a disincentive.

–It may or may not be large enough to make a meaningful difference. 30% was a completely arbitrary number. It is essentially an alternative, expanded formulation of the luxury tax, which has had mixed results in limiting the payrolls of the highest-spending teams. In order to effect dramatic change, something truly draconian (and entirely implausible) may be necessary. A mere 30% tax on the overage of averages could be insufficient. Are the Dodgers really substantially less likely to spend an additional $10m on player talent if it means paying an extra ~$200K to ~15 other teams below the mean of league spending, than they are if it means paying the current luxury tax on that $10m expense? Perhaps that’s not enough, but the point here is the mechanism rather than the amount.

Short of a rigid salary cap + floor system (which the parties involved would never agree to), there is no magic bullet to level the playing field. A system like the one described above may actually have a chance of reigning in the mega-markets, and no such effective mechanism exists now.

Doing something effective with regards to this issue would be a huge boon to owners. Otherwise, with their coming mega-enrichment (via the potential spinoff of MLBAM Tech), contract prices could see runaway inflation, leaving some clubs completely in the dust.

–The owners may not like the removal of some other forms of welfare, such as the qualifying offer and draft pick compensation system (because in this scenario, it’s actually the players who wind up bearing the cost of subsidizing the smaller market clubs).

From the perspective of labor:

–The fact that it’s not a salary cap, and perhaps less of a hard cap than the present luxury tax, may make it quite palatable to the players association.

–It would replace qualifying offers and attached draft picks, which are a complete bane to the attached players to the extent they’re not the type of players who would be signing very long contracts.

–While pre-MLB players are not their concern, this does liberalize the entire process of talent pricing and acquisition, which is fundamentally a good thing long-term for ballplayers.

–They may not be thrilled with the fact that it imposes some MLB spending sanctions on a larger number of clubs, even if the penalties are not as dramatic as the luxury tax. However, and critically–since those proceeds will be distributed primarily to other teams for the purpose of player spending, it doesn’t take money out of the ecosystem system in total, unlike the current luxury tax and amateur overage penalties.

***

This is merely a very basic idea. And the simplicity is a virtue. This is not the entire solution. Perhaps a mechanism needs to exist to ensure a club can’t simply walk with proceeds—making a club ineligible to receive tax proceeds unless their current year spending was at least equal to the average of their prior three seasons (or no more than 10% below).

It is, however, a potential solution which actually works to punish irrationally high spending (which was exacerbated and/or made rational by the current structures). Without an incentive shift along these lines, the problems will persist, if not grow worse, and probably via mechanisms we can’t yet envision today.

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