(*) MASTER NOTES: The behavioral economics of FAAB

My last Master Notes applied theories from the field of “behavioral economics” to fantasy valuation and drafting. Since these Master Notes got a nicely positive response (the tomatoes being thrown at me were fresher and more suitable for salads), I’m going to return to the theories, because I believe they can be usefully applied to another aspect of fantasy play: FAAB bidding.

With the season underway, we move from draft or auction planning to in-season roster management. And in many leagues, that means taking advantage of Free-Agent Acquisition Budget (FAAB) systems to get free agents for injury or demotion replacement, or just for position upgrades.

As I noted in those earlier Master Notes, we like to believe that when it comes our leagues, we behave like sharks: cold, emotionless machines always making decisions that optimize our chances of surviving in fantasy baseball’s perilous waters. Indeed, consistently successful players are often called “sharks” by leaguemates. (Enough with the elasmobranch analogy-Ed.)

The problem is that most of us are not Great White, uh, cartilaginous ocean predators. As humans, we are prone to economic decision-making errors that result from our emotional responses, especially to risk—the very premise of behavioral economics.

What’s a dollar worth these days?

The first area that can flummox our rational thinking is “the money illusion,” an inability to separate money’s actual purchasing power from the number printed on it. I have an example of this right in my own home. When Mrs. Masternotes is shopping online, she sometimes finds herself looking at items that Google has found not in Canada, our home and native land, but in some foreign country, where the prices are, naturally, presented in the local currency.

These local prices frequently discombobulate Mrs. Masternotes. If she sees a handbag worth 100 Canadian dollars priced in yen on a Japanese site, she scoffs that anyone would pay “almost 8,300.” (It's a good thing that Mrs. Masternotes never shopped for handbags in Weimar Germany or post-independence Zimbabwe.) But if she sees the handbag on a European site priced at 80 Euros, she complains at the “bargain” those lucky Europeans are getting.

This same disconnect can happen with FAAB bidding, because almost all leagues set their FAAB budgets at some number of “dollars” that is different from the $260 we are assigned for our auctions. Thus the money illusion: It can be hard for an owner instinctively used to the $260 auction values found in magazine and website valuations to re-calibrate the value of the FAAB dollars he is spending on players. In other words, he doesn’t properly adjust for the currency-exchange rate.

What this can mean depends on whether the FAAB starting budget is higher or lower than $260. If the FAAB amount is higher, prices will naturally rise. For example, a player worth $10 in the pre-season projections is properly valued at $38 in a $1,000 FAAB league. But an owner could experience psychological resistance to paying what “feels” like Mike Trout money to roster Nori Aoki. Such an owner could be plagued with recurrent underbidding and, thereby, missing out on free-agent players.

Conversely, if the FAAB amount is lower than the league auction salary, prices should naturally be lower. That same player worth $10 in the projections is worth less than $4 in a league using $100 of FAAB. An owner in this league could find herself chronically overspending, and thereby depleting her FAAB budget too quickly. Little wonder BaseballHQ.com founder Ron Shandler many years ago found that players in $100 FAAB leagues tended to make higher bids for players, in real terms, than owners in $1,000 leagues.

The money illusion is made worse by “anchoring,” which I discussed last week. It is the phenomenon in which people tend to “anchor” expected prices and then resist movement away from them—even if the actual value of the money is different.

As a result of this money illusion and anchoring, Mrs. Masternotes would happily pay a “reduced” price of €80 from a store in Portugal for that handbag that costs 100 bucks in Canada, because “80” is less than “100.” Of course, the true value of the handbag, based on converting Canadian dollars to Euros at the prevailing rate, is actually around €70, so she is actually paying more!

What’s it gonna cost me?

Another set of behavioral quirks, identified by Amos Tversky and Daniel Kahneman (the stars of Michael Lewis’ book The Undoing Project), is packaged as “prospect theory.” It says, among other things, that people are more averse to the risk of loss than they are attracted to the prospect of gain.

In many experiments, subjects were offered their choice of a guaranteed amount or the chance to flip a coin to either more than double their money or lose it all. Even though the expected value of making the bet was always more than the guaranteed amount,  the great majority of subjects opted for the sure thing. They wanted to avoid the loss. (You’ll find the same psychological desire not to lose also occurs when you’re making trades.)

Now think about this in terms of FAABing. The basic proposition is to either keep your FAAB money—the guaranteed amount—or to flip a coin on a free-agent player, and risk either losing the FAAB on a dud acquisition, or doing OK with the free agent but missing out when a better free-agent comes along—a newly anointed closer, say, or in only-leagues, a star player like Jonathan Lucroy last year, crossing over from the other league.

If so, this rationalization of hoarding FAAB seems irrational on its own. Even in deep only-leagues, an owner who has started with any kind of decent roster will FAAB a limited number of free agents. So we would expect several hoarding owners to end up with some FAAB unspent, especially in $1,000 leagues. I play in a $1,000 AL-only league and plenty of owners finish every season with unspent FAAB money.

So what do I do?

The trick in all this is adjusting our behaviors to avoid the negative effects—or, even better, to take advantage of them.

First, focus on estimating the actual value of possible free agents under your league rules. If algebra isn’t your thing, the basic formula is:

(Auction value x FAAB Budget  / Auction cap)

So in a $1,000 FAAB league, a $10 Aoki is worth $10 x 1000 / 260, which is 10,000/260, which is $38.46. In a $100 FAAB league, he’s worth $10 x 100 / 260, which is 1,000/260, which is $3.85.

But even when you have this better adjusted value, let it inform your deliberations, not anchor them. FAABing is a different game, and you need to approach it with different expectations and reactions.

Aoki’s “actual value” means the likelihood of him actually moving you in the standings. In that way, it’s like trading, when you should be willing to “lose” a trade to get the player who will most help you move in the categories. So you should, for example, be more willing to bid aggressively if Aoki will be replacing a player who is out for months, than if Aoki is a temporary two- or three-week filler. In fact, for a short-term replacement, it's a sound tactic to lowball your bid on the top available guy and then put in a whole pile of minimum bids on available warm bodies.

Also remember you are competing for players, and some of your competitors will be rational sharks owners. If your league commish service allows you to review all the FAAB bids (most of them do), check every week to see who bids aggressively and who is more conservative. As well, take a gander to see which other teams might value potential targets as highly as you do for similar category-management reasons.

Try not to be irrational in calculating the risks, the potential losses and the potential gains. Instead of focusing on what happens if the free-agent doesn’t pan out, focus instead on the possibility of gain (real gain, not pie-in-the-sky).

In particular, accept that a successful bid now could cost you a shot at a league-crossing star later. It doesn’t happen that often anyway, and if you commit to hoarding, you have to out-hoard everybody in your league. And even if you think you have the hammer, you could lose it if your league allows your competitors to trade FAAB dollars and/or to get FAAB refunds when players are hurt or traded out of the league. As well, acting early pays the additional dividend of giving you more games with the good player on your roster than you’ll get with a great player who comes over at the deadline.

If you’re really committed, do a full-on decision analysis comparing the chance of acquiring more value later with this FAAB bid amount against the chance of getting value immediately and for longer. Remember to convert all values to a standard amount based on $260.

The biggest risk is leaving your FAAB on the table at the end of the year. Spend it like it means something right now.

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