"Bestiary of Imagined Causes"

In 2003, a book entitled "Moneyball" (perhaps you've heard of it) upended the baseball apple-cart, effectively overturning over a century of entrenched dogma, including ingrained beliefs, valuations, and standard operating procedures.  

Moneyball, as we all know, is about the existence of market inefficiencies and the manner in which the Oakland A's identified and exploited those inefficiencies. Statistical analysis was the tool by which the A's more accurately valued ballplayers than the market. What Moneyball did NOT explain was why these inefficiencies existed in the first place. That question was the precursor to the events of Moneyball.

Shortly after publication, Michael Lewis began to look into this very question, a journey he documented in the December 2011 issue of Vanity Fair. His journey necessarily led him to the work of psychologist Daniel Kahneman. Kahneman, while studying the decision-making process, discovered that people unknowingly incorporate irrelevant factors into their decision-making process. This discovery was directly at odds with economic theory that viewed market participants as being rational and selfish.

To identify the existence of market inefficiencies, you have to first conclude that the marketplace does not incorporate all readily available information of value. That the decisions of market participants are, in some respect, irrational. Kahneman's work made that conclusion easier to reach.

One of Kahneman's research experiments was to rig a wheel-of-fortune. It was marked from 0 to 100, but was rigged to land on only 10 or 65. Kahneman would stand in front of a group of people, spin the wheel and ask the people to write down the number on which it landed, which of course was 10 or 65. He would then ask two questions: (1) Is the percentage of African nations among UN members larger or smaller than the number you just wrote? (2) What is your best guess of the percentage of African nations in the UN?

The wheel was entirely unrelated to the question asked, but it affected the answers that were given. The average estimate of those who saw the number 10 was 25%. The average estimate of those who saw the number 65 was 45%. The group had included wholly irrelevant factors, which served as a kind of anchor for their thought processes/answers, in its decision-making.

Kahneman's work led to the establishment of a sub-field of economics known as "behavioral economics." That field ultimately sparked the interest of Harvard undergraduate Paul DePodesta who went on to exploit the irrational decision-making of baseball market participants.

While DePodesta put the work of Kahneman to good use, another premier baseball mind sought out Kahneman long before DePodesta discovered him.

On June 4, 1985, Bill James wrote a letter to Kahneman. James sought out Kahneman in hopes of determining why baseball professionals always tried to explain random events; why they tried to extract meaning from inexplicable events; why they tried to order a universe that frequently defied order. The letter read, in part, as follows:

"Baseball men, living from day to day in the clutch of carefully metered chance occurrences, have developed an entire bestiary of imagined causes to tie together and thus make sense of patterns that are in truth entirely accidental. They have an entire vocabulary of completely imaginary concepts used to tie together chance groupings. It includes 'momentum,' 'confidence,' 'seeing the ball well,' 'slumps,' 'guts,' 'clutch ability,' being 'hot' and 'cold,' 'not being aggressive' and my all time favorite the 'intangibles.' By such concepts, the baseball man gains a feeling of control over a universe that swings him up and down and tosses him from side to side like a yoyo in a high wind."

Whether or not ALL these phrases are "completely imaginary concepts" is still debatable, but those that are would be examples of irrelevant factors included in the decision-making process. The inclusion of such factors ultimately leads to the creation of market inefficiencies in Major League Baseball. On a micro level, it's almost impossible not to have James' premise in mind whenever you hear announcers, managers, or players prattle on about these concepts. I find that James' letter, to a certain extent, now frames my thinking on the subject.

In the modern game, statistical analysis has become the tool by which smart organizations attack and exploit those unfounded beliefs that arose out of the efforts of baseball men to explain the discrete events of the sport. In an effort to give practical meaning to those events, baseball men incorporated irrelevant factors into their decision-making process. The flawed decision-making process created market inefficiencies; inefficiencies that could ultimately be exploited if those irrelevant factors could be identified and stripped from the decision-making process.

Ninja Stealth Detrimental to the Reds?

Despite what one may think of Wayne Krivksy's player personnel moves, it's difficult not to marvel at the secrecy that shrouds all of his acquisitions.

In a world that is shrinking every day due to improved technology, where information about most topics is available at the click of a mouse, Krivsky still manages to operate with ninja stealth.

Amazingly enough, Krivsky manages to make all of his big trades without the press ever catching wind of it. He must have worked extensively as a plumber, as the Reds front office never has any leaks. The ease with which the Reds withhold information from the media makes you wonder how much information is intentionally leaked to the media by other organizations. Regardless, one has to question whether or not the media blackout is advantageous to the Reds.

It's possible to infer two things from the lack of advanced notice of Reds' trades: 1) Krivsky maintains a small inner circle in his decision making process, which may not allow for the most effective use of the Reds front office personnel, and 2) Krivsky's insistence on silence may be preventing him from accurately gauging the trade market.

1) KRIVSKY'S INNER CIRCLE

The resignation of Johnny Almaraz last season is additional evidence of first inference. Almaraz left in part because he didn't feel part of the inner circle. He wasn't being included in the player personnel discussions and decisions. In fact, Almaraz said this following his resignation: "I'm not included in any of the discussions and, in fact, when I walked into the suite during the Winter Meetings, Wayne and his people would lower their voices to a whisper or take their discussions into the bedroom."

In reading John Schuerholz's book, Built to Win, one of the things he stresses is the importance of utilizing all the strengths of the organization. Schuerholz likens himself to the conductor of an orchestra, who simply works to bring out the best of the entire organization, relying on the individuals strengths of each member when appropriate.

In fact, Schuerholz mentions sending out messages to his entire scouting staff when he is interested in acquiring a player. Any of his scouts with information on the player then responds and provides his $.02. Schuerholz then utilizes this information in making the ultimate decision. Knowledge is power in all instances of decision making and it holds true in player personnel decisions.

It's difficult to know whether Krivsky works in a similar fashion, but it's hard to imagine that he does. Given what Almaraz said and the fact that there is likely to be more information in the media if Krivsky was relying on his entire scouting staff. The more people in on a discussion, the more likely there will be a leak. However, word of trades leaking out might not be such a bad thing.

2) THE MEDIA AND PLAYER VALUATION

As for second inference, it might actually be helpful for Krivsky if the rumors about the prospective deal were circulated. If word leaked out that the Reds were on the verge of a deal, then maybe the media reaction, fan response, or follow-up communication from other GMs would help the Reds determine if they were on the verge of making a solid trade. In addition, letting word leak out might bring better offers to the table, the result of which would be more value in the deal for the Reds.

The Twins have been using the media to play the Yankees and Red Sox off against each other in the Johan Santana trade talks. In so doing, the Twins have managed to get each team to up its offer. While they haven't yet received a deal to their liking, they have managed to get better offers than they would have received. The Reds would be unable to utilize this type of value maximizing strategy, as they are dead set on confidentiality in their dealings.

Krivsky thrives on bringing in undervalued talent, like Hamilton, Phillips, and Cantu. In that type of deal, there is little need to get an accurate read on the market, so his stealthy style is not a detriment. However, it is difficult to deny that Krivsky struggles to get maximum value for the established Reds players. It happened in the Kearns trade and I would suggest that it has happened again with the Hamilton deal.

In the final analysis, Krivsky needs to both widen his decision making circle to better utilize the resources of the organization and use the media to better gauge the market and flush out additional trade offers. It's imperative for the mid-market Reds to maximize the value of their assets and making these two changes is a step that may make it possible.

"The Signing": Francisco Cordero

I've been avoiding writing about the Francisco Cordero signing, but clearly it's the 800 lb elephant in the room, so it's time to tackle it. I've been avoiding it because I am of two minds on the signing.

The Reds signed Cordero to a four year contract worth $46M. Cordero gets $8.5M in 2008, $12M in 2009, $12M in 2010, and $12M in 2011. In addition, the Reds negotiated for a team option for the 2012 season at $12M, which also comes with a $1M buyout.

PROS

1) It's obvious that the Reds could not afford to have another season ruined by an inept bullpen. The fans would not tolerate it and Krivsky's career might not survive it. Accordingly, Krivsky once again identified the problem, targeted the solution, and moved quickly to sign Cordero. It's the same M.O. that he demonstrated with the Alex Gonzalez signing.

In 2006, The Reds were undone by the bullpen, as the lack of a reliable closer cost them countless games. That problem was only resolved by the arrival of Eddie Guardado, who provided a stabilizing influence in the 9th inning.

In 2007, the Reds were once again undone by the bullpen, but this time the problem wasn't the closer, but rather the 8th inning. The Reds had no reliable option to get the ball to David Weathers, who performed admirably as the closer. The emergence of Jared Burton late in the season helped offset the problem, but countless games were once again lost by the flawed bullpen.

In 2008, the arrival of Francisco Cordero will bump everyone up a role. Cordero will work the 9th, Weathers/Burton will move up to handle the 8th, and everyone else will be relegated to 7th inning work.

2) Francisco Cordero was tremendous in 2007. It's hard to see it any other way, as Cordero posted an impressive 2.98 ERA, 1.11 WHIP, 2.6 BB/9, and 12.22 K/9. In addition, Cordero's peripherals support his level of performance, as he posted a FIP of 2.19 and a BABIP of .324. Cordero was actually that good in 2007.

3) The Reds signing Cordero weakens the Brewers. By signing away their dominant closer, the Reds weakened the Brewers and forced them to sign Eric Gagne for $10M. The allegations of Gagne's steroid use only increase the risk for the Brewers.

CONS

The "only" true con to the contract is that it completely flies in the face of every sound small-market organization principles.

General Rules for Smaller Market Organizations

1) In order to compete with organizations with larger revenue streams, a smaller market organization must get more production per dollar spent than the larger revenue organizations. If the Reds get the same amount of production per dollar spent as larger market organizations, then the Reds will lose due to the larger resources available to their competitor. The Reds must maximize the amount of production they receive for every dollar they spend, as that's the only way to compete in the current Major League Baseball marketplace.

2) Given the volatility of relief pitching, it's unwise to offer much more than two year contracts to relief pitchers at free agent prices. The inherent volatility of performance means that it is unwise to hand out big money to most relievers, as those relievers aren't likely to be able to earn their money in each year of the deal, which means the team is drastically overpaying for the production they receive.

3) Given the limited playing time of relievers, the impact that they can impart on the game is substantially less than that of starting pitchers or position players. Accordingly, it's wise to focus limited resources where they will have the most impact.

4) Small market organizations should only pay for players who provide unique production. If a player provides production that is easily replaceable at a lower cost, then that's not the most efficient use of resources.

WIN SHARES ABOVE BENCH ON THE REDS

Bill James' Win Shares is the quickest way to look at the unique of the player's production. Win Shares Above Bench (WSAB) compares a player's win shares to what an average bench player would have received given the same playing time. An average bench player is not a scarce commodity, so paying huge coin for production that is not unique, but rather easily obtainable, is unwise. The money should be spent on those players whose contribution creates the the most wins for the team and accordingly those players who possess the most unique value on the marketplace.

In 2007, Francisco Cordero pitched only 63.1 innings and posted a WSAB of 5. For comparison, David Weathers had a WSAB of 5, Jared Burton was at 4, Aaron Harang was at 12, Adam Dunn was at 9, Edwin Encarnacion was at 7, Josh Hamilton was at 6, and Brandon Phillips was at 5.

Team WSAB per Dollar Spent

Again, to be successful, smaller market teams must get more production per dollar spent than the competition or else they will lose just by being outspent. Accordingly, I took a quick and dirty look at the cost (using estimated team payroll) paid per each WSAB for a select number of organizations.

Here's how it panned out:



So, in 2007, the Reds paid more for each WSAB ($1,299,347) than the World Champion Boston Red Sox ($1,178,690). Not surprisingly, the D-Backs and Rockies paid substantially less, as they rely on young, impact prospects who provide great production and don't cost an arm and a leg. That, in large part, is how they were able to compete with the big money teams.

Are the Reds gaining any ground on the big boys by paying $46M over 4 years to a pitcher who was only had 5 WSAB? There seem to be more efficient and effective ways to spend such a massive amount of money than on a relief pitcher.

CONCLUSION

In a vacuum, the move is terrible and violates most sound mid-market baseball principles. However, baseball moves aren't made in a vacuum, rather they are made under a particular set of circumstances. Given the Reds futility in the late innings, it's understandable that the Reds made the move they did. However, despite the logic behind the move, the Reds aren't likely to beat the odds, which are stacked against such a deal.

If the Reds rely on cost effective young talent in the future, then they likely won't be hurt by having so much money tied up in a closer. If the Reds rely on Hamilton, Bruce, and Votto, then Cordero's contract is less damaging. If that's the case AND Cordero remains healthy AND consistent, then this deal will likely workout just fine.

However, there are quite a few "ifs" in that statement and given that likely relievers Sean Watson, Carlos Fisher, Pedro Viola and Josh Roenicke are on the horizon, this deal may ultimately prove to be unwise expenditure of resources, which is about the worst thing a mid-market team can do.

Krivsky moved fast to correct a flaw, but it may have been the equivalent of swatting a fly with a bazooka. We'll have to wait and see what the collateral damage is on this signing.

Rule 5 Draft and the Danger of Convention

con·ven·tion (kuhn-ven-shuhn) –noun - a rule, method, or practice established by usage; custom: the convention of showing north at the top of a map.

FRONT OFFICE INNER WORKINGS

It's difficult at times to determine what exactly is going on inside a front office. We don't have a backstage pass or a behind the scenes show that enables us to see behind the current. Accordingly, we are often left to draw inferences from the decisions that are made. That said, it's difficult to view today's Rule 5 draft machinations by the Reds as anything other than an unwise adherence to convention.

In today's game, there are a number of organizations that embrace unconventional thought, including Oakland, San Diego, and Boston. Instead of relying on centuries old baseball dogma, they have consistently sought out new and better ways of doing things.

These are the same organizations that have embraced statistical analysis as a way to improve player valuation, a characteristic that has come to define them, but in actuality they are better termed "pragmatists." Or, perhaps the "independent thought" organizations. They are willing to consider new ideas and ways of doing things. They consider old problems in new ways. When the new way works, they keep it. When it fails, they discard it. But, at least, they are willing to question everything in their quest to build a better mousetrap.

RULE 5 DRAFT

That said, today's Rule 5 draft revealed that the Reds don't yet belong in that class. Under Krivsky, the Reds have made a lot of improvements. They've added value through unconventional means and haven't been afraid to make necessary changes. However, it's clear that there is still room for improvement.

In the Rule 5 draft, the Reds left unprotected and subsequently lost Carlos Guevara. Guevara has been dominant in each season in the Reds organization. However, the Reds could never get past the idea that he doesn't have a good fastball, relying instead on a screwball. Evidently, the Reds viewed him as nothing more than a gimmick pitcher who is unlikely to have success at the big league level. The general convention is that right-handed pitchers cannot be successful without a 90+ mph fastball and, evidently, the Reds bought into it.

However, with the next pick after losing Guevara, the Reds selected Sergio Valenzuela. Valenzuela is a right-handed pitcher out of the Braves organization. His performance in the minor leagues pales in comparison to that of Guevara.

It appears that the Reds downgraded a spot on their 40 man roster because they couldn't see past traditional baseball "wisdom." The Reds chose the unsuccessful conventional pitcher from the organization with a track record of quality pitching over the unconventional pitcher who has had nothing but success.

MINOR LEAGUE TRACK RECORD AND METHODS OF PLAYER VALUATION

In 5 minor league seasons, Carlos Guevara posted a 2.91 ERA, 1.20 WHIP, 11.6 K/9, and 3.2 BB/9. On the other hand, in 4 minor league seasons, Sergio Valenzuela posted a 5.58 ERA, 1.51 WHIP, 3.1 BB/9, and 5.0 K/9.

The "independent thought" organizations recognize the importance of event outcomes in their player valuation, which is the foundation of statistical analysis. The "conventional" organizations focus strictly on the "process" in player valuation, which is the basis for traditional scouting.

Evidently, the Reds felt that Guevara's impressive results were substantially outweighed by the manner in which he went about getting them and that Valenzuela's poor results were substantially outweighed by the manner in which he got those results. Both of those premises strike me as being rather dubious, but, as always, time will reveal the truth of the matter.

Ultimately, the Reds chose to adhere to convention and probably cost themselves a solid reliever in the process. Guevara may turn out to be ineffective at the MLB level, but at the very least he earned a cup of coffee to find out. Not surprisingly, it's the Padre organization that will give Guevara his chance after they traded to obtain his rights from the Marlins. Regardless of whether or not Guevara pans out for the Padres (though I suspect he will), it speaks volumes that the Padres were willing to give him a shot where the Reds were not.