April 17, 2012; Atlanta, GA, USA; Kansas City Royals starting pitcher Wade Davis (22) pitches in the first inning against the Atlanta Braves at Turner Field. Mandatory Credit: Daniel Shirey-USA TODAY Sports

Wade Davis and THE TRADE


I have been considering building a capital budgeting framework for valuing baseball trades, and Wade Davis’ start this week pushed me to starting.  Davis’ potential is actually intriguing to me, so I wanted to find a way to see how good he needs to be for me to be okay with giving up Wil Myers.  Capital budgeting is a concept from corporate finance that focuses on modeling cash flows and discounting them to present value for project selection.  Using this idea on expected wins from the players in a trade could be a great way to see what team got the better end of a trade.  I will show you a simple model that I built in about three minutes for THE TRADE and then I will discuss the assumptions and what needs to be done to make this sort of thing work properly.  If you want to forego said discussion I understand, but input from others might help me flesh this idea out more and would be appreciated.

2013

2014

2015

2016

2017

2018

Shields

4

4

0

0

0

0

Davis

2

3

3

3

3

0

TWins

6

7

3

3

3

0

Dwins

6

6.4

2.5

2.3

2.0

0

Royals 2013 Win Equivalent

19.1

Myers

1

3

4

4

4

4

Odorizzi

0.5

1.5

1.5

1.5

1.5

1.5

TWins

1.5

4.5

5.5

5.5

5.5

5.5

Dwins

1.5

4.1

4.5

4.1

3.8

3.4

Rays 2013 Win Equivalent

21.4

Discount Rate

10%

 

The main components to this are projecting the WAR values from each player for the contracts/player control time that was traded.  Then coming up with a discount rate, that would approximate the win inflation over the time period, to make sure wins this year are worth more than subsequent years.  The rest of it is just simple math.  As you can see I am not including Elliot Johnson, Mike Montgomery, or Patrick Leonardas I believe there value to the teams is either zero or close enough to zero that I can ignore

December 12, 2012; Kansas City, MO, USA; Kansas City Royals general manager Dayton Moore (left to right), newly acquired pitchers James Shields and Wade Davis, and manager Ned Yoast pose for photos after the press conference at Kauffman Stadium. Mandatory Credit: Denny Medley-USA TODAY Sports

them.  I put James Shields down for two seasons similar to last year at 4 WAR each, and then zero from then on out since his contract will end.  Then I projected Wil Myers and Jake Odorizzi and played with what Wade Davis would have to do to make the trade somewhat even.  You can quibble a lot with these projections, but whatever they are, Davis is going to have to be pretty good to make this trade valuable for the Royals.  TWins are a sum of all WAR for the year for that side of the trade (Shields + Davis or Myers + Odorizzi), and DWins use the discount rate to present value the wins in terms of now.  As I go on I will be discussing how to make a model like this better since this one is pretty simple.

First, the projections need to be better.  I am pretty comfortable with Shields, but the others are much harder to project.  My preference would be to crowd source these win values to get expectations from multiple fan bases both biased and unbiased, but that would require me having a significant amount more power in the blogosphere.  In lieu of that I will probably need to go look at scouting expectations and then use aging curves for the three players who are younger and going to be around for a while.  Once you have those it is just a matter of setting a discount rate.  A win this year is more valuable than a win next year, and though you could argue for specific times and specific teams this could change a lot, I think this is still a good assumption.  How to set the actual discount rate could go several ways though.

You could try and set a league wide discount rate using win inflation, meaning look at what team payrolls are per WAR year over year recently, and then project an inflation rate from there.  This could be a good way to set the rate, but it is not what I was thinking.  You could also do this on a team by team basis since the Tampa Bay way won’t allow it to grow payroll at the same rate as the Dodgers or Yankees.  Personally, I would prefer to set inflation rates separately for the players.  The model above assumes one discount rate, consistent with a league-wide win inflation rate, but I think each player’s risk profile might give better results.  That way we could use what we know about the players to set the rate.  Prospects are riskier, so their discount rate should be higher than established big leaguers (we are more confident in what James Shields will be than the other three so his discount rate should be lower).  Also, pitchers should probably have a higher discount rate than position players due to higher injury risk and year to year variation.  Once you have done all this, a good estimate of each trading team’s expected present value of wins should be formulated, and then you move on to money.

One team or the other (or for multi-team trades you could compare more) is going to have an edge in WAR expectancy, but that is not the only factor.  Payroll should be used as well.  In the case of this trade the Royals have a lower win expectancy and took on more payroll with Shields’ contract, which is why most stat heads gave the clear victory to the Rays on the trade.  Anyway, that is an introduction to the method I would like to develop.  If you like it or have any questions or modifications I should consider let me know.

 

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Tags: Jake Odorizzi James Shields Kansas City Royals Mike Montgomery MLB Wil Myers

  • jimfetterolf

    Not sure how to calculate it, but the idea of “marginal wins”, the last wins gained by a trade would be a factor.

    Based on the team Dayton Moore thought he had going into last year before injuries and this year healthy and after signing Santana and Guthrie, an extra five, six, or seven wins could be enough to reach the playoffs two years, somewhere in the 85-90 win range assuming good health and reasonable progression from the young guys. For Tampa, the loss of even a couple of wins in each of two years knocks them out of the playoffs in a tight, strong division. These marginal wins would be extremely valuable now for the Royals in terms of standings, attendance, and future ability to sign free agents.

    For the pitchers, both teams did have the advantage of a solid pipeline of talent available by ’15, for the Royals an advantage in that they now have the star pitcher who can be traded for prospects at some point to mitigate the loss of minor leaguers given up for Shields and Davis, for Tampa they had young arms they felt could step in while saving a fairly heavy payroll hit.

    My guess is that both teams win this trade based on their own parameters for delivering what they needed now.

    • Brian Henry

      Team situation is one thing I have considered factoring in. The switch from Myers to Francoeur and such would then need to be considered as well. That much context might make it impossible for something generalizable to be had though.

      • jimfetterolf

        That switch is hard to quantify, as Myers is in the minors and when he does get promoted, is he Mike Trout or is he Clint Hurdle? Our recent experience with Alex Gordon, Mike Moustakas, and Eric Hosmer give a possible idea of what Tampa can expect, as Myers has never been considered a Harper-level prospect capable of making an immediate and substantive impact.

        As for the context, that is important, five more wins for the Royals is worth a great deal more than five extra wins for the Astros while two fewer wins for Tampa is much more damaging than two less for the Twins. Context has a lot to do with value, that’s why I like the marginal win Idea, trying to value those last few wins. In that regard, for the first two years, I think the Royals win the trade easily because they received two rotation pieces for some minor leaguers. After that it’s a matter of how the teams use their value, both should have pieces available for trade, the Royals will have payroll room next year for FA signings, a playoff berth making the team much more attractive to an impact corner OF or 2B, if one is on the market.

        Good piece, BTW. I like what you bring.

        • Michael Engel

          One player has been a Harper-level prospect. Bryce Harper. Okay, I’ll accept two and the other would be Stephen Strasburg.

          Every scouting report from the draft and on has Myers as an advanced bat with an advanced approach. Had he been drafted as an outfielder rather than a catcher, he’d have had more helium, but they tried to see how long they could keep him there.

          But that question isn’t all that vital to the general baseball idea Brian presents regarding value post-trade.

          • jimfetterolf

            Do you see Myers as a Gordon/Moose/Hoz level prospect?

            I agree with Brian’s approach and appreciate a business oriented POV, which is why we are trying to hone projected values.

          • Brian Henry

            I see Myers as a future power hitter with 150+ strike outs a year. No idea of defensive value. What I would say is that you would probably do the valuation absent of current team formation first and then look at the contextual to see if you are willing to pay a premium if you are on the losing side of the deal like the Royals are in this case.

          • jimfetterolf

            Not sure that four minor leaguers for two SPs and a UIF can be considered a losing side just yet. Myers may be Albert Pujols, he may be Jeff Francoeur. At the moment the Royals are leading 0.8 fW to zero :)

          • Michael Engel

            I do. He could have had even more prospect luster on him, too, because he didn’t have the struggles like Hosmer did in his first full pro year or that Moose had in Wilmington. He’s hit everywhere, always been a top 3 hitting prospect in the organization. Yes, he’s absolutely that kind of prospect. He’s never not been that kind of prospect. If most of the league wasn’t certain he was going to UNC, he’d have been a first rounder. I can’t find the 2009 3rd round slot amount, but he got $2 million and slot sure as heck wasn’t $2 million.

            Boston almost took him in the first round, but, again, that UNC idea caused hesitation – http://fullcount.weei.com/sports/boston/baseball/red-sox/2012/11/27/how-wil-myers-almost-became-a-red-sox-in-2009/

          • jimfetterolf

            I ran the first two year fWARs on Billy Butler, Alex Gordon, Mike Moustakas, and Eric Hosmer and came up with a total of 7.1 fW, 0.89/player year with AG and MM generating some of the value as 3B. If Myers is Alex Gordon Tampa does better, if he’s Eric Hosmer Tampa does worse. That at least gives us a range.

            As for Hosmer’s first year, he then got his eyes fixed and went nuts.

  • ccw3

    As a Rays fan I think this trade is awesome for the Royals. And its too bad there isn’t a WAR for how much better Shields makes other pitchers around him. And I’d be surprised if Wade Davis isn’t a 15 game winner with over 200 innings by next season.

    • Brian Henry

      If you are right on Davis, then the trade will end up pretty good for the royals.