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8/3/2019 Risk Aversion in MLB
1/23
Risk Aversion in Major League Baseball
and its Impact on Winning Percentage
Devin Ensing
ECON 385
Professor Treber
December 4, 2011
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I. Introduction
Payroll disparity in baseball is a widely discussed topic, and many attribute the
disparity to differences in revenue between small and large market teams. The underlying
cause for concern is competitive balance, as studies have shown that teams with higher
payrolls typically enjoy greater success on the field. Another payroll related topic that has
received little attention is how payrolls are actually spent. Teams differ not only in how
much they spend on players but also how they distribute their payroll. For example, the
wildly successful 2001 Seattle Mariners spent only 48.7% of their payroll on starting
players while the 1998 New York Yankees enjoyed even greater on field success while
spending almost 63% of their payroll on starting players. Moreover, the 2004 Detroit
Tigers won only 72 games while spending over 79% of their payroll on starting players,
and the 2003 Baltimore Orioles won only 71 games while spending just over 26% on
starting players. Anecdotal evidence is inconclusive regarding whether there is a
relationship between payroll allocation and winning. While these examples suggest
payroll distribution may not influence team success, I believe that payroll distribution
will in fact influence a teams winning percentage. If such a relationship does exist, then
it is another issue to consider when addressing competitive balance.
I am interested in determining whether risk aversion on the part of owners can
explain variation in payroll distribution for Major League Baseball (MLB) teams, and as
an extension, whether variation in payroll distribution contributes to differences in
winning percentages. Although general managers complete all team transactions
themselves, I contend that owners have the final say and thus teams are constructed to fit
their preferences. Personal preferences and risk aversion are very difficult to measure,
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especially for owners in professional sports. However, risk averse individuals generally
prefer to be insured rather than uninsured. I speculate that money spent on non-starters in
MLB serves as insurance against poor performance or injury to starters. Consequently, I
argue that the higher the percentage of payroll spent on non-starters, the more risk averse
the owner.
To test this conjecture I assume owners in small revenue markets would be more
risk averse than owners in large revenue markets. This assumption begets the question of
whether large market teams spend a greater proportion of their payroll on starting players.
To address this question I estimate a simple model of payroll distribution. I then turn to
address the question of whether spending a higher percent on starting players impacts
winning percentage.
The remainder of this paper is constructed as follows. Section II provides an
overview and discussion of the relevant literature pertaining to the economics of Major
League Baseball and past estimates of risk aversion and winning percentage. Section III
lays out an economic model, the Von Neumann-Morgenstern expected utility model, to
illustrate how risk aversion could impact the payroll distribution in MLB. Section IV
develops empirical models to address the primary questions of interest and discusses the
data used to estimate the regression equation. Section V interprets the results from the
two regressions, first estimating risk aversion and then determining whether or not
payroll distribution has an impact on winning percentage. Finally, Section VI concludes
the paper by discussing implications of the regression results and wraps up by discussing
possible improvements in the study and extensions for future research.
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II. Literature Review
While there have been studies that focused on aspects of risk aversion in sports,
this paper deviates from all previous studies by estimating risk aversion from the owners
perspective. However, other papers have components that are valuable to study and learn
from. Bishop et al (1990) examined risk aversion and free agency in the NFL. In the
context of a median voter model, they use risk aversion to investigate player support of
free agency. They find that a players attitude towards downside risk may be an important
determinant of his willingness to support free agency. In addition, the restricted form of
free agency may well be preferred by a majority of players to unconditional free agency
(Bishop et al, 115).
Bill and Linda Woodland (1991) focused on a different group in a study on the
effects of risk aversion on sports wagering, notably the differences between betting on
point spread versus odds. The authors use calculus to determine maximum likelihoods of
risk aversion for bettors, finding that the amount of money wagered on point spread bets
was greater than that generated by odds betting. They also found that the current market
structure is a consequence of risk averse attitudes of bettors (Woodland, 638).
The closest a paper has come to dealing with the topic of risk aversion in baseball
from an owners perspective is Maxcys (2004) paper examining risk management for
long-term contracts. The author found that firms have an incentive to reallocate risk with
long-term labor contracts (Maxcy, 109). Although this paper is not concerned with how
contracts are structured, they do play a part in payroll allocated to certain players. Owners
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usually have to pay a premium to keep their star players, either from a higher average
annual value (AAV) contract or a longer contract.
While there have not been many papers dealing with risk aversion, there have
been papers trying to estimate winning percentage in baseball, which is the second topic
this paper is concerned with. The most notable paper that attempts to estimate winning
percentage is Scullys (1974) paper wherein he estimates players marginal revenue
products (MRPs). Scully uses a two-equation model, first estimating a teams win-loss
record from different team inputs, then estimating the team revenue function that relates
team winning percentage among other statistics to revenues. He finds that a team raising
their win-loss record by one point increases team revenue by $10,330 (Scully, 922).
MacDonald and Reynolds (1994) build off of Scullys paperand argue that a
players value is based on his contribution to team winning percentage, as team winning
percentage is significantly correlated with team revenue. Owners want players that most
increase the teams revenue, but the authors do not estimate whether owners prefer high-
risk/high-reward players, or players who are more consistent. The regressions show that
mean runs scored is arguably the best indicator of an offensive players production
(MacDonald and Reynolds, 447), and thus is the statistic that should be used in
determining whether or not a player should be acquired.
Hakes and Sauer (2006) wrote their paper as an Economic Evaluation of the
MoneyballHypothesis, based on the bookMoneyball by Michael Lewis. Before the
book was published, there were certain offensive statistics that were overvalued, such as
batting average and runs batted in, and some were undervalued, such as on-base
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percentage and slugging percentage. Hakes and Sauer show that the ability to get on base
was undervalued and conclude that the Oakland Athletics strategy for winning games in
the early 2000s was a successful exploitation of a profit opportunity (Hakes and Sauer,
183). The authors also argue that the market corrected itself within a year of thebooks
publication, showing that owners adjusted their personal preferences for risk aversion
based on the new information.
III. Model
I am interested in whether owners exhibit risk aversion in putting together a team
each season. I argue that this would be observable in decisions regarding the proportion
of payroll dedicated to backup players. A risk averse owner would sign more players with
less overall talent. A risk preferring owner would focus their resources on securing high
quality starters and dedicate a much smaller fraction of their payroll to backup players.
This concept can be illustrated using the Von Neumann-Morgenstern expected
utility model. Expected utility is defined as the expected value of utility over all possible
outcomes (Frank, 180). I want to determine the risk aversion of owners that leads to
their highest expected utility. Instead of using wealth to measure utility, I will be using
the number of wins for a team in a season to measure the total utility generated by the
team for the owner.
In the expected utility model, a risk averse owner will have a concave expected
utility function, as he experiences diminishing marginal utility of wins, as seen in Figure
1. This means that as the number of wins by the team increases, the owners marginal
benefit from each additional win decreases. We cannot conclusively determine the risk
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aversion of an owner simply based on wealth or revenue, but I believe wins are a better
measure to determine utility. I want to determine how risk averse they are, in the sense of
how much they are willing to gamble in order to increase their odds of winning more
games. Investing more into your starting players and less into your backup players can be
seen as more of a gamble, as injuries and subpar performances can derail a season easier
for teams with more invested in star players. Thus, a team with more invested in starting
players is much less risk averse than a team with payroll distributed more evenly.
While in most cases the expected utility function is concave, in some instances the
function can be convex or linear. If the owner is risk preferring, then the expected utility
function will be convex, as seen in Figure 2, where the owner will have increasing
marginal utility of wins. If the owner is risk neutral, then he has a constant marginal
utility of winning, which results in a linear expected utility function, as seen in Figure 3.
I hypothesize that owners of teams in small revenue markets will be much more
likely to be risk averse and thus have concave utility functions. As they have a lower
payroll, an injury to a player taking up a large chunk of the payroll would diminish the
number of wins, and thus the revenue that the team would generate. By the same
reasoning, I believe that large market teams will have convex utility functions, as they are
able to overcome injuries much easier by simply spending more money on replacement
players.
We can use this theoretical framework to show why a small market owner may
choose to field a team with a balanced payroll, while a large market owner may choose to
field a team with a less balanced payroll, with more money going to star players.
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Suppose an average team, with 81 wins per season, was considering signing two
star free agents. The owner estimated that if these players produced as expected the team
would win 90 games. However, if the stars underperformed or were injured, the team
would win only 70 games. The owner assumes there is a 50% chance either could
happen. If the owner did not sign the free agents and continued to have a more balanced
payroll the team is virtually guaranteed to again win 81 games.
Based on my assumption that an owner of a small market team would be risk
averse, I use an expected utility model of E(U) = Wins. If the owner were to continue to
have a more balanced payroll and get 81 wins, their expected utility would be exactly 9.
Would it be worth it to spend the extra money and sign the two free agents? The owners
expected utility from this gamble would be 8.93 ((0.5)*70 + (0.5)*90 = 8.93). Since
the owners expected utility from the gamble would be less than the expected utility
without signing the free agents, they would choose not to sign the star players and instead
continue to employ a more balanced payroll, which can be seen in Figure 4.
My assumption for large market teams is that they would be risk loving, so their
expected utility model would be E(U) = Wins2. Signing the two free agents would give
the team a 50% chance of winning 75 games and a 50% chance of winning 87 games.
Keeping a balanced payroll and winning 81 games would result in an expected utility of
6,561 (this number is only important to view in the context of other risk loving utilities).
The expected utility of the gamble of signing the two free agents would be 6,597
((0.5)*752 + (0.5)*872= 6,597). Since the owners expected utility from the gamble is
higher than keeping a balanced payroll, they would choose to sign the star players, which
can be seen in Figure 5. Their preference is for a top-heavy payroll, with stars making a
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lot of money. They can more easily afford to make mistakes or deal with injuries because
their revenue is greater, so they can simply sign a free agent or trade for a good player on
another team.
These examples show that there is a higher probability of a large market team
having higher risk preferences than a small market team. In the next section, I will run
regressions that attempt to quantify whether or not small market teams really are likely to
be more risk averse.
IV. Empirical Model and Data
This paper uses a panel data set covering each Major League Baseball team from
1998 through 2010. I chose this period because it captures all of the years after MLB
expanded to 30 teams with the inclusion of the Arizona Diamondbacks and the Tampa
Bay Devil Rays in 1998. For each team year, I collected payroll data for both teams and
individual players, offensive statistics for teams, and the market size each team belonged
to. The information was collected from several different baseball websites.1 Table 1
presents summary statistics on all of the variables used in my regressions.
To answer my questions about risk aversion and whether it matters, I ran two
different regressions involving risk aversion. The first regression is intended to test for
the presence of risk aversion in payroll decisions. This regression should show why
1Team salary data was collected fromhttp://content.usatoday.com/sportsdata/baseball/mlb/salaries/team/,www.cbssports.com/mlb/salaries,www.baseball-reference.com, andwww.mlbcontracts.blogspot.com/. Individual player salaries, used to calculate the percentage oftotal team payroll utilized for starting and backup payroll, was collected fromwww.baseball-reference.comandwww.baseball1.com. Market sizes were found using Forbes estimates forvalues of MLB teams atwww.forbes.com/lists/2011/33/baseball-valuations-11_land.html.
http://content.usatoday.com/sportsdata/baseball/mlb/salaries/team/http://content.usatoday.com/sportsdata/baseball/mlb/salaries/team/http://www.cbssports.com/mlb/salarieshttp://www.cbssports.com/mlb/salarieshttp://www.baseball-reference.com/http://www.baseball-reference.com/http://www.baseball-reference.com/http://www.mlbcontracts.blogspot.com/http://www.mlbcontracts.blogspot.com/http://www.baseball-reference.com/http://www.baseball-reference.com/http://www.baseball-reference.com/http://www.baseball-reference.com/http://www.baseball1.com/http://www.baseball1.com/http://www.baseball1.com/http://www.forbes.com/lists/2011/33/baseball-valuations-11_land.htmlhttp://www.forbes.com/lists/2011/33/baseball-valuations-11_land.htmlhttp://www.forbes.com/lists/2011/33/baseball-valuations-11_land.htmlhttp://www.forbes.com/lists/2011/33/baseball-valuations-11_land.htmlhttp://www.baseball1.com/http://www.baseball-reference.com/http://www.baseball-reference.com/http://www.mlbcontracts.blogspot.com/http://www.baseball-reference.com/http://www.cbssports.com/mlb/salarieshttp://content.usatoday.com/sportsdata/baseball/mlb/salaries/team/8/3/2019 Risk Aversion in MLB
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certain teams have a preference for spending a smaller proportion of their payroll on
starters. The equation for the first regression model is as follows:
PctStartingPayroll = 0 + 1*League + 2*LgMarket + 3*SmMarket + 4*Lag1WinPct
In this regression, I am including an indicator variable for the league that the team
is in, as well as the market indicators. The league indicator variable is used to control for
the difference in offensive environments due to the designated hitter rule. The DH is used
in the American League, but not the National League, which leads to more runs scored in
the AL. This could lead to different preferences on spending money, as owners in the AL
need to spend more money on an extra starting hitter. This means the league indicator
variable, using a 1 for AL teams and a 0 for NL teams, should be positively correlated
with risk aversion. The market indicator variables will control for the difference in total
payrolls caused by the difference in revenue potentials from market size. There will be
two different market indicator variables, one for large market teams (such as the New
York Yankees and Boston Red Sox), and one for small market teams (such as the Tampa
Bay Rays and San Diego Padres).
For both the first and second regressions, I collected total team payroll for the
year, and manually calculated starting and backup payroll using individual player salaries
for the eight or nine starting position players (depending on the league) and the starting
pitcher on Opening Day. There is a wide range of starting payroll percentages, and I
would like to discuss why some teams have certain values. The minimum percent of
starting payroll was only 24.85% by the San Diego Padres in 2002. They had a payroll of
just over $41 million and spent only $10,295,000 on starting players. Two players
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accounted for about half of the bench payroll: Trevor Hoffman, one of the greatest
closers of all time ($6,600,000), and outfielder Ray Lankford, who was being paid over
$8 million but only started half of the teams games. The Padres only won 66 games, and
finished last in their division. The maximum percent of starting payroll was 82.14% by
the 1998 Chicago White Sox. Their total payroll was $38,335,000, of which $31,490,000
was spent on starting players. They were incredibly risk loving, as a large majority of
their payroll was spent on their nine starting hitters. Still, the White Sox won only 80
games in 1998, showing that such a strategy does not guarantee success.
The worst team over the period was the 2003 Detroit Tigers who won only 26.5
percent of their games. Interestingly, they dedicated a nearly identical percentage of total
payroll to starters (62.4 percent versus 62.9 percent) as the 1998 New York Yankees, the
team with the second best record in the data set. This seems to indicate that the risk
aversion factor might not be a good predictor of current winning percentage.
Unfortunately, while the team statistics are entirely accurate, salary information is
not. Some player salaries include earned bonuses while others do not, and some salaries
depend on the team that the player is on. Many times, a player is not being paid what he
is worth because he is either very young and in his first contract, or very old and getting
paid for past production. So team payroll is not a direct representation of team skill. The
only issue with payrolls is the few cases where team payroll did not match up to the sum
of player salaries that played for the team. There are explanations for this, such as player
bonuses being included or excluded, player trades, or teams paying a portion of salaries
of players on different teams (usually from the dumping of mediocre players on to
other teams, where the trading team agrees to cover a portion of the players salary in
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exchange for not having to play the player anymore). This affects the percentage of
starting payroll variable slightly, but I found in most cases team payroll matched up and
the difference is statistically negligible.
While I am interested in determining whether or not I can measure risk aversion, I
am also interested in whether this decision impacts team success. The second regression
uses risk aversion as a predictor variable, along with other team statistics, to try and
predict team-winning percentage. The coefficient on the risk aversion variable will tell us
whether spending more on your starting players should help you win or lose more games.
The equation for the second regression model is as follows:
WinPct = 0 + 1* PctStartingPayroll + 2*BattingAge + 3*RpG + 4*OPS+
The individual level statistics I collected for each team are used in this second
regression. They were the average age of their hitters, the number of players that had an
at-bat in a year, and team offensive statistics, such as runs per game, hits, home runs, and
on-base percentage. Like Scully, I collected these statistics to estimate winning
percentage. The average age of a hitter should be positively correlated with team winning
percentage as the older a hitter is, the more experience he should have. However, both the
1999 Florida Marlins, which had the youngest team in the sample, and the 2006 San
Francisco Giants, who fielded the oldest team, had losing records. The number of players
that batted for a team in a year should theoretically be negatively correlated with winning
percentage, as it usually means there are injuries or players from the minor leagues that
are getting at bats, signifying that the teams best players are not hitting as much or as
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well as they should. The team offensive statistics should all be positively correlated with
winning percentage, as the better a team hits, the more games they should win.
The one offensive statistic that I ended up using in my regression, on-base
percentage plus (OPS+), needs explanation. On-base plus slugging percentage (OPS) is
simply the sum of on-base percentage (OBP) and slugging percentage (SLG). OBP is
calculated as the number of times a player reaches base divided by the total number of
chances a player has of reaching base. SLG is calculated as the total number of bases
divided by at-bats. OPS+ normalizes OPS by adjusting for park effects and league effects
to get a better estimate of how each hitter (or team) performed. It is placed on an easy to
understand scale, where 100 OPS+ is exactly league average, and every point above or
below is one percentage point above or below league average hitting. OPS+ can be
compared across teams and years because it is adjusted, unlike normal batting statistics
such as average or OPS. The mean OPS+ for the sample was 96.6, meaning that the past
thirteen years were worse offensively when compared to the rest of baseball history. The
mean OPS+ for all time is 100, but since there has been an inflated hitting environment in
the past decade, a hitter in 2011 will be considered worse than a hitter in 1971 with the
same statistics.
Many of the offensive measures for teams that I collected could not be used.
Some cannot be used to compare across teams and years as the offensive environment has
changed, but the bigger problem is confounding variables. There are some variables that
cannot be included in regressions because it is impossible to increase one variable while
holding another constant. Home runs provide a good example of this. Unfortunately, it is
impossible to have an increase in home runs without an increase in OPS+, so I am not
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able to include both home runs and OPS+ in my regressions, as the coefficient on OPS+
would not accurately reflect the contribution of OPS+ to winning percentage. As a result,
OPS+ is the only team offensive statistic that is included in either regression.
The biggest issue I faced in attempting to measure risk aversion was determining
what constituted a starting lineup. Was it only position players? Or position players,
starting pitchers, and the closer? For simplicitys sake, as well as the belief that the
starting lineup of a baseball team will be the players that take the field during the first
inning of the first game of the season, I defined the starting roster to be the starting
position players in game one of the season and the starting pitcher. For American League
teams, this is the eight position players and the designated hitter, plus the starting pitcher,
for a total of ten players. For National League teams, this is only the eight position
players and the pitcher, for a total of nine players (there is no DH in the NL). The starting
lineup qualification was used to determine percent of payroll spent on starting and
reserve players. Baseball teams have a total of 25 players on the roster, so the other 15 or
16 players make up the payroll spent on reserve players.
V. Results and Analysis
The results from linear estimation of the first equation are provided in Table 2.
The only coefficient that is statistically significant is the league indicator variable, with a
p-value of 0.001. This shows that the only consistent variable that influences an owners
choice of risk aversion is the league in which the team plays in.
The league indicator coefficient suggests that if a team were to switch from the
National League to the American League, the percentage of payroll dedicated to starters
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would increase by 3.67 percentage points. This shows the differences in payroll related to
the number of starting players. The variable used to measure risk aversion depends
mostly on hitter salaries, so having an extra hitter in the lineup (as the DH) means that a
team will have to spend more money on hitters and will thus be less risk averse.
Although the coefficients on the market size variables were statistically
insignificant, they could still be economically significant. The coefficient on the large
market variable shows that an increase of one in the market size from medium to large
market size will lead to a 1.94 percentage point increase in percentage of payroll devoted
to starting players. The coefficient on the small market variable shows that an increase of
one in the market size from small to medium size will lead to 0.19 percentage point
decrease in percentage of payroll devoted to starting players. Small market teams are
expected to spend less on their starting players and more on their backups than large
market teams, which is reflected in the magnitude of the coefficients.
The last variable in the first regression was one-year lagged winning percentage.
My hypothesis is that the higher a teams winning percentage in the previous year, the
less risk averse the owner will be this year as they are more likely to go for broke, and
try to win it all the next year. The statistic is not significant in the regression, but the
coefficient suggests that a one percentage point increase in winning percentage last year
actually leads to a 5.79 percentage point decrease in percentage of payroll devoted to
starting players, suggesting a team that won more games the year before will be more risk
averse. This is in direct opposition to the hypothesis that I claimed before running the
regression. One potential reason for this is that teams spent above their normal capped
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payroll the year before and the owner wants to cut back on spending this season so they
do not lose money.
The results from running a linear estimation on the second equation can be found
in Table 3. All statistics in this regression were found to be very significant with p-values
of 0.000. An increase of one year in the average age of batters on a team leads to a 0.0117
percentage point increase in winning percentage. The older a team is, the more
experience it has, and the better it performs. Obviously, this is not true by the time
players are in their late 30s, but younger hitters will then replace them, so the cycle
continues. Also, a one percentage point increase in OPS+ leads to a 0.0033 percentage
point increase in winning percentage.
An increase of one run per game leads to a 0.0399 percentage point increase in
winning percentage. This is very significant. For example, a team with a .500 winning
percentage would then have a winning percentage of .540 if they scored one more run per
game, which is about 6.5 more games won per season, a large increase equivalent to an
average team becoming a contender for the playoffs. This backs up MacDonald and
Reynolds claim that runsscored is arguably the best indicator of a player or teams
offensive production.
Finally, a one percentage point increase in the percentage of player salaries
devoted to starting players leads to a 0.102 percentage point decreasein the teams
winning percentage. This regression shows that the more risk averse a team is (only to a
certain extent as they have to have some percentage of payroll devoted to starting
players), the more they will win.A team should spend more money on backup players
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and less on starting players. If a team were to decrease their spending on starting players
by one standard deviation, they would spend 10.20% more of their payroll on backup
players. This means a team would increase their winning percentage by 1.04 percentage
points, or a .500 team would now have a winning percentage of .5104. Over an entire
season, that is the equivalent of 1.68 more wins, which could easily be the difference
between making the playoffs and staying home. Had the 2011 Atlanta Braves increased
their win total by just 1.68, they would have made the playoffs and the St. Louis
Cardinals would not have even made the playoffs, let alone won the World Series.
VI. Conclusions
One difficulty that I ran into while completing this paper was differentiating risk
aversion of owners with different spending habits. As the definition of my starting lineup
consists of almost all position players, a team that wants to spend more money on
position players will be seen as less risk averse. Although, it is risk aversion in itself to
spend more money on hitting as pitchers have a higher probability of getting injured than
hitters. The real intention of the paper was to see how owners allocate their money,
whether to a few star players or spreading it out more to role players. While the definition
could be changed based on the researchers own beliefs, I believe that my definition of
risk aversion was appropriate for the task at hand.
Future research on this topic should use larger sample sizes to more accurately
measure how teams have been spending money. Perhaps spending habits have fluctuated
over time, and we are just now at the point where teams are valuing starting players
higher than before. I also did not attempt to evaluate the impact of outliers (such as the
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Yankees) on the data set, so a further study should determine whether some team payrolls
should be excluded. A final improvement would be to look at more team statistics,
including pitching statistics, to determine whether that would impact the risk aversion
coefficient and ultimately the impact on winning percentage.
While the conclusions stemming from my regression may not be groundbreaking
results, the idea behind this paper could be.Moneyball was a best-selling novel because it
showed how one small-market team could exploit inefficiencies to become one of the
best teams in baseball, regardless of payroll. The idea behind risk aversion could
theoretically do the same thing. As Fangraphs notes, you can make a case that teams are
currently being too risk-averse and that there is a possible inefficiency that could be
exploited.2 If an MLB team could tweak this model and use it to determine the optimal
amount and percentage of money they should spend constructing their roster, they could
be gaining an advantage over other teams. My regressions showed that a team would
benefit from spending a lesser percentage of their payroll on starting players and a greater
percentage on backups. While this does not mean they should have starting players with
lesser talent so that they do not have to pay them as much, it does mean that backups are
more important than their current valuation.
2Dave Cameron, Linear Dollars Per Win, Again.http://www.fangraphs.com/blogs/index.php/linear-dollars-per-win-again/
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Figures and Tables
Figure 1: risk averse owner
Figure 2: risk loving owner
Wins
Utility
W1 W2
U(W1)
U(W2)
U = U(W)
Wins
Utility
W1 W2
U(W1)
U(W2)
U = U(W)
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Figure 3: risk neutral owner
Figure 4: risk averse owner example
Wins
Utility
70 80 81 90
U = U(W)9.49
8.37
9.008.92
Wins
Utility
W2W1
U(W2)
U(W1)
U = U(W)
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Figure 5: risk loving owner example
Table 1: Descriptive Statistics
Variable Mean Std. Deviation Minimum Maximum
Total Payroll $70,699,056 $33,070,793 $9,202,000 $209,081,577
Starting Payroll $39,833,950 $21,264,617 $5,595,000 $142,574,714
Backup Payroll $30,865,107 $14,929,546 $3,607,000 $85,421,103
Pct of Starting Payroll 55.89% 10.20% 24.85% 82.14%
Winning Percentage 50.00% 7.28% 26.50% 71.60%
League Indicator 0.467 0.500 0 1
Large Market Indicator 0.333 0.472 0 1
Small Market Indicator 0.333 0.472 0 1
Batting Age 29.05 1.425 25.2 33.5Runs per Game 4.757 0.503 3.17 6.23
OPS+ 96.60 8.12 77 118
Wins
Utility
75 87
5,625
7,569
U = U(W)
81
6,597
6,561
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Table 2: Risk Aversion of Owners
N = 390, R2 = 0.0415
Variable Coefficient p-valueLeague Indicator .0367353
(.0109108)0.001
Large Market Indicator .0193987(.0132494)
0.144
Small Market Indicator -.0018552(.013552)
0.891
Lagged Win % -.0578703(.07701)
0.453
Standard Errors in parentheses
Table 3: Impact on Winning Percentage
N = 390, R2 = 0.4874
Variable Coefficient p-value
Pct of Starting Payroll -.1020363(.0264865)
0.000
Batting Age .0116631(.0019613)
0.000
Runs per Game .0399073
(.0083906)
0.000
OPS+ .0032768(.0005238)
0.000
Standard Errors in parentheses
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