The Winner's Curse

Alternate title "Why FA Signings Rarely Work Out (and what that means for the Cavs) - Part 2"

In Part 1 I used Deron Williams as an example of why even a player who appears worth his massive contract can set a team behind in the chase for a championship when other teams have access to high quality but much cheaper options. In part two I am going to talk about why most big FA signings flat out don't involve players living up to that contract. Think Larry Hughes.

OK, that was cruel, I'll give you a minute to wash the vomit out of your mouth and I'll see you after the Jump.

The Auction Winner's curse is a well know concept when it comes to markets. In a lot of ways it is related to theories centered around the notion that markets are efficient. Basically it comes down to this- if you win an auction with a high bid you are de facto saying that you know more about this item (in our case a player) than any of the other bidders. If you got to compete against hand selected teams, ie only the Clippers and the Kings were involved in the bidding with you, it wouldn't be unreasonable at all to claim that you were smarter than they were and your bid is much closer to the players true value. Realistically though there are many good GMs in the league and several exceptional ones who also have the opportunity to appraise the situation. Even those without cap space could usually find a way to dump salary if they thought the player was truly a bargain (this does increase the cost of acquiring the player but if you were getting a GREAT deal it would be worth it in most cases). This basically means one of two things

1. You are the smartest/luckiest GM in the league on this contract.

2. There is very little chance that the player you signed will outplay his contract.

Number 2 is simply much more likely than #1 and so in most cases of good signings you only see a small amount of value gained. On the downside of the contract though you can have

1. Bad luck- a string of injuries/arrests makes the player's value plummet

2. The rest of the pack were right and you over payed.

Here the downside is much larger than the likely upside with the potential for horrifically bloated contracts weighing your franchise down for years to come. This is the essence of the winner's curse- limited upside with much larger downside combined with the fact that the rest of the bidders are actively disagreeing with your sentiment means- you are likely screwed.

There are several exceptions to this rule in today's NBA.

1. Your own players. It is much more reasonable to claim to have more information on players you have worked with for years and seen at practice every day. You also have other incentives you can add to their contract- such as early extensions which reduce risk, and thus hold value, for the the player.

2. High risk players. When the risk is obvious, such as a history of injuries, it drives down the value and thus the cost of a player. This allows for a much higher ceiling + a higher floor. Consider signing a former highly drafted player who has underperformed his first 4 years in the league due to injuries for 5 mill a year. If he is a bust and continues to be injured you lose 5 mill a year but if he puts those problems behind him he could end up being worth 10-15 million a year. Consider how much easier it is for a player to be worth 10-15 million a year (there are several dozen in the league at any time) than it is for a player to be worth 25-30 million a year (there are only a handful) and you can see why betting 5 million on a talented but trouble player is a better bet than 15 million on a very good player without major issues.

3. Players worth more than the Max. The Cavs aren't landing Dwight, stop dreaming. Er, how about stop dreaming about Dwight and spend your time dreaming about the Unibrow!

If I haven't convinced you yet think about this. When was the last TERRIFIC mid level exception signing? How many can you name that worked out really well? How many can you name that didn't work out so well? Because every team can use the Mid-level at no extra cost the above theory would predict that these signings would be among the least valuable in the league.

These two posts describe why I don't want the Cavs to spend a penny on high priced FAs like Eric Gordon or Chris Kaman this offseason.

This is a Fan-Created Comment on The opinion here is not necessarily shared by the editorial staff at FearTheSword

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