The Z Files: The Flaws with Auction Pricing

With the LABR (League of Alternative Baseball Reality) in the rear view mirror and Tout Wars weekend approaching, it's time to turn our attention to auctions. That said, the focus of the past few weeks -- the flaws of conventional valuation -- will still be front and center.

However, before delving into that, here are a couple of archived Z Files with an auction theme:

How To Create an Auction Budget

Auction Strategy Primer

As mentioned, auction dynamics will be discussed in terms of Flaws and Limitations of Valuation Theory. Exploiting one of the major flaws will be explained, followed by illustrating a practical shortcoming of setting formulaic bid values.

One of the tenets of conventional valuation is that prices are assigned to exactly enough players to fill everyone's Opening Day active roster, with the assumption they are the only players to occupy that spot all season. As was demonstrated in Minding the Gaps, multiple players will populate several roster spots, availing free loot.

Another repercussion of this valuation flaw is the pool of drafted players will not match those you deem draft worthy. In an auction, there will be many players purchased you have priced below the minimum $1 bid. This skews the money distributed to the players with a positive bid price.

I took the most recent projections from RotoWire, BaseballHQ and Mastersball and generated the draft-worthy pool for four common leagues: 12-team AL-only, 12-team NL-only, 12-team mixed and 15-team mixed. Here are the average number of players differing between any two projection pools:

The exact number of players isn't important and will differ year to year, but it usually hovers in this neighborhood. Here is the amount of money spent if the above players were purchased at sticker price:

Like with the number of players, the exact amount isn't relevant. Just know this scenario occurs every season, with the number of players and money spent in this ballpark.

Using 12-team mixed as an example, you don't know which 23 hitters will be purchased that you have priced below $1. That's OK, you aren't interested in them anyway. However, what this means is you can eliminate the bottom 23 batters in your pool, provided legal lineups can be constructed from the remaining 145 hitters.

From a valuation perspective, this turns a $4 player into a $1 guy as conventionally, the worst player on an active roster is priced at $1. The remaining 145 batters are adjusted, accounting for the $134 spent on the 23 absent batters. The consequence is quite intriguing. Here's the bid prices for the top hitters, first without adjustment, then recalculated based on the pool bereft of the 23 bottom players and corresponding money:

Due to the nature of valuation, the prices of the best players absorb the majority of the found budget. Don't get lost in the math and valuation methodology. The bottom line is you have around $6 of free loot to spend on hitters and it's fine to use it to "overpay" for a stud, since you're not overpaying. The $46 for Acuna assumed the exact 168 hitters you assigned positive value to would be purchased, but history shows that won't be the case.

I'm going out on a limb here and assume not many of you set prices on your own. Don't worry, just take whatever price list you use and know you can go over the number for the studs. Once you get 25 or so players deep, the standard and adjusted prices are basically the same. Towards the end, you're "overpaying" $3 or so for the bottom 25, but auction dynamics saves you since everyone will be paying just $1 for the bottom several players (more on that later).

Mimicking the above for pitchers in 12-team mixed renders the following before and after pricing:

The same thing occurs. The elite arms are priced up, and you're not actually overspending if you go over your projected price. If you so desire, you can even allot the extra budget to the top of both pools, i.e. double up in one of the other.

Here's comes the buzzkill. After every purchase, bid prices change. If you've been in an auction, you know "overpaying" for the elite is commonplace. As this happens, the total pool money to be distributed dwindles rapidly, lowering the adjusted bid prices for everyone with each purchase. In other words, the above tables aren't an open invite to buy multiple players at the top and not worry about overspending. In 12-team mixed leagues, you have $12-$13 to play with at your discretion. That is, you can go over the standard prices, hopefully directed to the studs, by a combined $12-$13.

Sparing the math, the target for AL and NL-only leagues is $9-$10. It's around $10-$11 for 15-team mixed formats.

Before moving on, running the numbers for the recent LABR auctions, the "allowable" number to overspend was about a buck lower, which isn't a big deal. After all, there are even more flaws with valuation buffering the extra buck or two.

The valuation flaw as pertains to auction dynamics is more practical than theoretical, though it serves the same purpose: freeing up budget to spend elsewhere.

The number of players purchased for $1-$3 in an auction is always greater than is assigned by conventional valuation. Let's use the recent LABR auctions to illustrate:

In each case, auction dynamics resulted in more end game purchases than suggested by conventional valuation. This is standard protocol in auctions, baking in some end game profit.

When you consider what was learned above with respect to the difference in player pools, it's possible to bank double digits worth of potential profit in an acutely managed endgame. There will be $1 players selling for $1, but there are also players projected to earn more, going for the minimum. Experienced auction participants can do well here. You don't have to give back some of the expected return on investment, but knowing there's profit to be had at the end should make it easier to go the extra buck or two on more expensive players, assuring you spend the full allotted budget. Even if you have $4 to spend on four players, the numbers show you can turn a profit in dollar days.

Auctions are challenging, but also rewarding. Obviously, money management is key. Some contend having the most accurate set of bid values and adhering to them is critical. Sure, it's a factor, but understanding that accurate values don't actually exist and knowing how to take advantage of the limitations of valuation is a skill not owned by many.