12.23.2011

Is Albert Pujols Worth $254 Million? Part I

We return to the sports world today to talk about the economic concept of value. Albert Pujols was one of the greatest baseball players of the 2000's (if not the best), is currently on track to break a number of records which are sacred in the eyes of baseball fans, and, barring any Bonds-ian or Clemens-esque controversies, is a lock for the Hall of Fame. Heading into the most recent off-season, he was also a free agent, and, at the age of 31, was very clearly was on track for one last big payday.

So what was he worth? This was the question being asked by the management of the only team he had, to that point, suited up for, The St. Louis Cardinals, as well as other baseball executives and fans. He seemed almost certain to be baseball's second $200 million dollar man (after Alex Rodriguez who has twice signed contracts giving him that distinction). But how much more than $200 million?

At least according to one team, the Los Angeles Angels, the final answer was $254 million over the next 10 years. This left many pundits, happy fans in California, stunned fans in St. Louis and dozens of baseball executives wondering whether the deal was 'worth it'. In other words, was this the correct value to put on Pujols?

Of course value is a term with many different meanings to different people. Many people will subjectively look at the contract and think that there is no way someone should be paid that much money to play a game. Of course $254 million is a lot of money. Of course America is in a recession. Of course Mr. Pujols is getting paid to play a child's game. Of course numbers like this don't seem to make a lot of sense to people who are digging ditches every day or fighting for our country on the front lines.

However, subjective analysis is, well, subjective, and it isn't the best way to analyze this (or really any) contract. After all, many executives make more money that Pujols will under his contract just for the honor of destroying shareholder value (though that might be a post for another day).

One way to get baseball discussions to shift a little closer to the realm of objectivity is to use statistics. For those who don't follow the sport, or might only be passingly familiar with statistics like RBIs and home runs, there are baseball-specific ways to measure value called sabermetrics. These are most often measures of how much a player's specific statistics more generally benefit a team. Jamesian terms like win-share and wins over replacement, once the realm of uber-stat geeks, have become more familiar to common baseball fans.

In addition to being fan favorites, these types of measurements are helpful for executives as they allow for direct comparisons between players. They also help to set the market for free agents as a player statistically worth a relatively high number of wins can usually expect a nicer payday in comparison to lesser players. Many teams have gone so far as to base their scouting programs on such advanced metrics. Even non-fans might be familiar with this approach, or at least its name, as the 'moneyball' concept recently featured in a Hollywood movie of the same name.

While a subjective statement that someone is paid 'too much' and the use of sabermetrics are certainly ways to explain value, they also don't get right to the heart of the concept we are talking about today. Why is this? Well, the parties to the contract were thinking in economic terms when they signed it. And, in economic terms, the subjective concept of value we noted above is really inconsequential. Addtionally, the baseball measures of value explain how someone impacts a game, but not how they impact the bottom line at company they work for. Yes, that is correct, not the team they play for, but the company they work for. Let's not forget that it is the owners, and not the fans, who sign the checks.

Some owners care more about on-field results than others, but hardly any take too kindly to losing money. Therefore, in the analysis of 'is he worth it,' the owners really adhere to the economic definition of value. Of course most owners care what the fans think to some extent (subjective value), and of course, all things equal, most owners would prefer to win (sabermetrics analysis). However what they care about more is creating profits, and economic analysis is uniquely suited to determine whether they will be successful in that endeavor.

Players, of course care about economics as well. Quite simply, the equation is usually the more money the better.

However, what type of economic analysis is appropriate in this situation is something we struggled with a bit. Regular readers might be a bit surprised to hear that we first turned to Karl Marx for the answer, as we mulled over the idea that the labor theory of value is the best way to analyze whether Pujols is 'worth' his contract. At some point, however, this didn't hold up as we couldn't figure out any way to fit what Pujols 'produces' nicely into labor theory. In other words, since Pujols 'makes' hits, not, say, balls, bats or gloves, there is nothing to base his worth on in traditional Marxian analysis (of course to the extent that there are any neo-Marxists who are also baseball fans out there who think they can refute this there is always the comment section).

We also took a look at some other theories of value, but long story short, (and like we often do on the site) we finally settled on a simple supply and demand type of analysis. At the base of this analysis is the idea that Pujols is 'worth' the price someone assigns to his services that he accepts. As Pujols was offered $254 million, and he signed the contract, $254 is what he (or rather his services) are 'worth' (On a side note, while services can of course be valued under Marxian analysis, we still couldn't get around to understanding what is 'produced' by Pujols' labor...so supply and demand it is!)

We couldn't merely end the analysis there, however. Supply and demand should be thought of as an ethereal concept rather than a static one, so it is helpful to look ahead a bit as well. Therefore, we took the analysis a step further. However, our readers will have to wait for Part II for that...

4 comments:

  1. Anonymous15/1/12 19:03

    I hope Part II won't take as long to produce as the second Back to the Future movie!

    Also, not to be overly critical, but your valuation method of Pujols amounts to a tautology: they paid him $250 million, so he is worth $250 million. Well, what a relief! And here I was concerned that they OVERPAID, but I see now that would be IMPOSSIBLE. Whatever they pay him is the right price, just as long as its more than anyone else!

    Any meaningful discussion of whether he is "worth" $250 million would ask whether paying him $250 million was a good idea! In other words, yes, the market priced him at $250 million, but has the market made a mistake (not unlikely, given the small number of market participants?). That discussion is much more difficult, of course, and I'm hoping that will be the meat of Part II.

    To my mind, there are two ways of thinking about whether he is "worth" $250 million: dollars/win added, and dollars/revenue added.

    The first is essentially Moneyball. A player is not "worth" his salary if replacing him with a cheaper player (or players) amounts to more wins/dollar.

    But players are not REALLY paid to win games. Baseball is a business, and owners don't make money (directly) by winning a World Series. Winning games is something players do that increases revenue. In the most basic sense, making the playoffs means there are more games at which tickets and concessions may be sold. And winning the World Series increases the value of licensing and TV rights (although I hear the Angels' TV rights are spoken for!).

    Anyway, my criticism aside, really looking forward to Part II, and in particular how you would estimate the projected revenue increase Pujols will bring to the Angels to justify his paycheck.

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  2. Dear Reader-

    I also hope Part II doesn't take much longer to produce and publish (bar study beckons). However, if my two-parter is as entertaining as either Back to the Future or the first of its successors, I will consider it to be a wild success.

    Thanks for the careful reading, and the pointing out of the inherent tautology in any after-the-fact was s/he it 'worth it' conversation using supply and demand as an analytical tool. However, as noted, supply and demand is nebulous...it shifts, it changes over time. Sometimes it isn't even 'correct' (think imperfect information). I think (hope?) I will be able to capture some of these concepts in Part II, which is much more the meat of this article.

    How? While I discuss value in terms of wins and losses a bit, I do focus much more on your latter idea of worth, because isn't that what the parties cared about when signing the contract?

    At any rate, thanks for reading. Part II will be out soon and I will eagerly await your analysis at that point.

    JS

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  3. Anonymous16/1/12 10:15

    Thank you! I think my last comment was too caustic. Looking forward to Part II.

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  4. Not at all...thanks for keeping me on my toes.

    Part II is scheduled to go to the presses this evening, be sure to check in then.

    JS

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