Confessions of a market skeptic

Originally, I had intended to write this column in the offseason because it’s more of a musing than an advice column, but since I think that I’m much better at waxing philosophic than offering advice anyway, maybe my silence on the latter is the best I can give and a blessing in disguise.

I have something of an internal inconsistency, a philosophical chasm in the way I view fantasy baseball’s market and financial markets as they apply to my conception of the rest of the word and my overarching economic beliefs. This gulf prompts me to ask a question, the answer to which has the potential to be profoundly troubling to my view of self.

I have no intention of turning this post into a debate of political or economic philosophies, but this conundrum does rest a bit on my views, so let me just get through this very briefly— one sentence even. In economic matters, especially those that deal with the types of complex financial instruments that have such a potentially profound impact on the world’s economy, I’m extremely pro-regulation and unconflicted about my willingness to step on a corporation’s alleged right to make money to protect the masses from potential disaster. While you may be tempted to debate the merits of that philosophy, that is not the point of this post, so let’s not focus on that aspect of this post.

The point of this piece is that my feelings about fantasy baseball are 180 degrees opposite my macroeconomic leanings. In the fantasy baseball marketplace, I almost always prefer the deregulation. I don’t mind if there is no veto structure at all in a league, as long as participants are vetted to some very minor degree. I’m a proponent of the creation of more, and increasingly complex instruments to expand on the possible market transactions in the fantasy baseball universe. Seriously, has nobody at Yahoo proposed the idea of making it possible to propose three-team trades?

If we put aside the obvious differences between Mike Stanton hype and a housing bubble, such as the fact that there are no meaningfully harmful consequences that can result from the collapse of a fantasy baseball league, there’s one key difference that between the two that I’d like to discuss, as I don’t think most fantasy players think enough about it when evaluating the market transactions of others. Let’s begin with an anecdote.

About two weeks ago, in a 12-team mixed league in which I’m a co-owner, a trade ran across the board that sparked the ire of many a team. The trade was Dustin Pedroia for Leo Nunez and Brandon League. Obviously, this was before the news that David Aardsma may have Tommy John surgery in his future, though in the League-acquiring owner’s defense of the move, to his credit, he did speculate that he doubted Aardsma would be back and healthy, and presumed that given League’s performance, the job would actually be his all year.

The message board raged. The league called for a discussion regarding the possibility of instituting a veto system for trades— in its eighth year, there is none, except in a case in which one owner has what he feels to be evidence of collusion. At first look, I grumbled at the trade too, but upon giving it a little thought, I was fine with it, and not just on the philosophic grounds that an owner should be allowed free rein to act in any manner as long as he legitimately thinks such actions are toward the benefit of his team. No, there’s another dynamic at work here: the imperfect and inefficient trade market in fantasy baseball.

This owner needed saves. He was languishing in last place in the category. He had no closers at all, and therefore needed to acquire at least two to hope to be competitive in the category; adding one would have been of little to no value in terms of actual points to be accrued. Right there, the likelihood that he’s going to get near “equal value” for Pedroia is essentially low, if he wants to fill his needs swiftly and in one transaction. Think about how imperfect the market is for what he seeks – he needs to find a single owner who wants a middle infield stud (who is off to a slow start), and who is willing to part with two closers. Who has two closers to trade at once (and this league loves closers too, let me tell ya)? Basically, this owner is forced to take any option on the table that gives him the kinds of pieces he wants; there aren’t going to be many offers from which to choose.

So, he looked at his team, decided which players he owned had enough value to command multiple closers, picked the one for whom he had the best contingency plan according to his estimation and announced, “it’s closing time, ladies, and I’m willing to go home with any two of you, sight unseen, but it has to be a ménage de trois!” What other option did he have?

The idea that this owner could have gotten “fair value” for Pedroia exists only in a vacuum; that is, it exists only if you presume that the form in which the return value comes does not matter to him. Given his situation, clearly it did. One could argue that he should have made these moves step-wise, get one closer and another more valuable asset, then acquire closer No. 2 in a subsequent deal. However, trades aren’t so easy to make, and doing so would take time and effort, which are resources in their own right. He wanted to fill his need quickly and was willing to take a bit of a discount to do so—an entirely rational perspective. He’s further vindicated in that the League half of the equation looks like it will play out in accordance with his prediction, which was ridiculed by many I might add.

So, getting back to the philosophical debate, the point is that if the league were to regulate his actions ex post facto, he would have essentially been handcuffed. It’s reasonable to suggest that no similarly structured offers were on the table, so precluding his ability to make the move he did make would have been tantamount to preclude his right to make any similar move; a clear overreach. For the record, in this situation the commissioner rightly stepped in and announced that this trade would not be vetoed and that the (no-) veto policy was not up for review. Strong, decisive, and in my opinion, correct behavior. Props to you, sir.

The imperfections and inefficiencies of the market (it’s also really a pain to compare offers to make sure you get the best trade, etc.; it’s not like there’s open bidding) regulate the market substantially in the first place, effectively speaking. To then regulate the market after transactions have taken place, and effort had been made to traverse said market inefficiencies, seems excessive—again, provided everybody in the league can be trusted to play without training wheels.

Further, the introduction of a somewhat complex instrument to expand the transaction potential of the market, such as a three-way trade feature, would have increased the efficiency of this transaction and opened new options to the Pedroia dealer that didn’t previously exist. It’s my opinion that for him to have been able to markedly better in this (type of) deal, he would have had to get a third team involved. In fact, if he had been able to do that, I think he probably could have gotten a very nice deal done.

In the Wall Street market, where people and machines trade commodities, futures, and derivatives, the market is theoretically nearly perfect (wait, don’t go to the comment section to disagree yet, I’ll get to what I mean by that). Complex computer systems exist to shave pennies off of prices. So much attention is paid to detail that when the value of something shifts by a penny, warehouses of computers enact prop trades en masse to capitalize on the efficiency, and for those who run these outfits, the pursuit of faster internet connections to get to the “front of the line” when executing these trades is a virtual (no pun intended) arms race.

When I say the markets are perfect, I mean that anything you can possibly want, you can get. There’s a well-established market for it, and the price you pay for something is precise, even if not always commensurate with its true value.

Now, when we talk of complex financial instruments, it is my belief that, contrary to the proposition of their existence in fantasy baseball, many of them exist primarily to deceive and obfuscate the essential currency of the marketplace, value, risk, etc. Again, this is just my interpretation.

All of this is to say that in the real world, not only are the consequences of failure ever more dire, the need to expand the latitude of what market actors can do is non-existent. The character of these new expansions seems disproportionately skewed toward those who turn the market from a way to more efficiently distribute capital to promote widespread economic growth to a big casino with lots of new games with rules that the pit bosses (and gaming commission) don’t even understand.

Another item worth noting here is that the form of currency is quite precise in a real market, but much less so in terms of fantasy baseball. This is an imperfection, though an inescapable reality, that makes the trade market difficult. If we have a potential trade, and I’m off on my side by 8 percent, unless I have a player who is exactly 8 percent more valuable than the guy I’m slated to include, it is very difficult to reconcile this difference. “You don’t have change for a Jimmy Rollins?” “No, sorry, all I have is this Ryan Braun and I don’t want to break it.”

The way I reconcile my differing opinions hinges on the relative market imperfections and inefficiencies of the fantasy baseball aftermarket. I believe the de facto regulation imposed by that dynamic is substantial enough that additional regulation is not needed. What is needed, however—in both systems—are firm and well thought out parameters regarding the types of behavior that are and are not permissible.

But, there is another possibility here, the one that forces me question myself. I make no bones about my socialist-leaning political tendencies and because of them I don’t really participate in the investment market, even though I feel understand it better than the vast many who do. Perhaps my desire to regulate it is a much more selfish decision… I do participate in fantasy baseball, and I’m pretty good at it, if I do say so myself.

Could it be that I am really no different than the hot-shot trader who doesn’t want regulation because it will hamper his ability to personally thrive, even though such regulation may offer greater protection to the mass? The typical argument against regulation in financial markets is usually that those involved are smart and sophisticated and that we shouldn’t infringe on their ability to exercise those smarts in creative ways. Well, when thinking about how I’d like to be treated in the context of my fantasy leagues and my latitude to make moves and implement unconventional and perhaps excessively risky strategies, I’d say that sentiment applies.

I like to think my conviction is real, and the proof is that despite having an active interest in understanding how the economy works and even how people make fortunes off ruining the economic futures of others, I’ve never been tempted exploit any of that knowledge for my own financial gain. I’ve deemed that game something I’m not interested in playing. So, maybe actions speak louder than words and ultimately, I’m voting via my participation, because when it comes to fantasy baseball, I emphatically say, “Play Ball!”

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Comments

  1. KY said...

    I think this misses a significant difference in the markets.  A league has 12 or so people.  If someone makes a bad trade this effects the other 10 in a significant way.  If you sell all your 1981 Apple stock for $1 a share it doesn’t really hurt anyone except you. 

    Which illustrates that it may be a matter of league aesthetics.  Does your league want to reward people for selecting good players or for making good trades or for both equally?  If you want people to have to pick good players to win and not be able to rip off a bad owner to do it, you may have that aesthetic value drive your reason for a veto board.

    Your example would be more interesting too if it were definitely true that a team with no closers is better off with two closers and no Pedroia.  Has that been established?  Assuming head to head, will that team now win saves often enough to make up for the losing it may now incur in Pedroia’s categories?  If the other teams in the league could now count on beating Pedroia’s owner more often in hitting and losing more often in saves equally they would have no problem with the trade.  I suspect they are upset because they will beat Pedroia’s former owner a little more often, but Pedroia’s new owner will beat his former owner and them even more often.

    But I could be missing something.

  2. Dub Boys said...

    In my mind, this trade is not even close to being veto worthy? Would I make the trade if I am giving up Pedroia, probably not. But it is still early enough in the year that getting a couple guys might give you some points down the road. On the flip side, why should the guy getting Pedroia be penalized for pulling off, on the surface, a fantastic trade? It was obviously void of collusion, so I say have at it. Vetoes are an awful way to run a league. In my mind a trade should only be overturned if there is clear collusion. Otherwise, man up and prey on the gullible players who might be panicking. I am in a very competitive league and there have been some bad trades, but all were made with the intent of improving their team now or in the future. I say to the league members bitching about it….get over it….you are just mad you were not able to pull off the heist for Pedroia….

  3. Braves Fan said...

    Sometimes desperate owners make bad decisions. In addition to examining a trade for collusion, a trade must also be viewed based on how it will affect the competitiveness of the league as a whole, both short-term and long-term. I think this is what KY was hinting at.

    If we assume that the team getting the worse end of the deal is already the worse of the two teams in the trade, then it’s not beyond imagination that this team will probably be even worse after the trade. This might eventually result in the owner of the bad team to go AWOL.

    Deregulation might be good for the market, but at what expense to competitiveness?

  4. Paul Singman said...

    Even though it’s not the conventional fantasy article, I do really enjoy these “waxing philosophic pieces, Derek. Don’t think there’s anyone writing right now whose better at discussing the theoretical aspects of fb in a clear yet interesting way.

    One simple reason to open up the trading market is that the “complex trading mechanisms” you propose aren’t that complex. I think everyone can understand the workings of a three-way trade. If, however, things evolved to where people could trade options on players or whatever other crazy stuff people could think of, then I believe regulation would have to start to come into play at some point.

    I also agree with KY’s point about how the mistake of one in the fantasy baseball market has a much more direct effect on the 11 other people that compose the masses, and so they have more of a reason to want to regulate stupidity, or what may appear to be.

  5. Derek Ambrosino said...

    Thanks guys.

    KY – League is roto, BTW. So, that should clear up the confusion for KY. (I guess you missed my hotbutton “H2H is just an inferior version of roto article smile).

    http://www.hardballtimes.com/main/fantasy/article/why-head-to-head/

    Good point, Paul… about my article’s being fantastic. No, seriously, good point re: the complex tools are actually quite simple. If you were to get into trades that allow future draft picks, FAAB dollars at x% interested, deferred contract payments, and future rights to minor league players, it would be a lot easier to image somebody ripping off a caper that could really define the dynamic of a league for years to come.

    My use of the term “complex instrument” to refer to a three-way trade was actually somewhat sarcastic. And, the sentiment is genuine – seriously, why is this not a basic option on major FB providers?

  6. Dub Boys said...

    re: Paul. But who is to say what is definitely fair or not fair? Sure on the surface many trades look lopsided, but what if Pedroia doesn’t recover and has an off year and team 2 could have gotten 40 saves out of the two closers and gained 5 points in the standings? Let free market reign. We are no more “experts” than the next guy who makes a trade. Sometimes it works out, sometimes it doesn’t….but to say you should be able to veto trades to keep it “fair” with the 10 other teams is one of the more ludicrous things I have read on this site. if you want to improve your team, you should be allowed to trade anything for anyone, and barring collusion you let the chips fall where they may. None of us are blessed with 20/20 hindsight when we make trades. To allow vetoing….you have no one to blame but yourself if there is a mediocre player in your league. So put something in your constitution that allows for immediate removal of the team manager if he/she does not meet some sort of bench mark for futility. We have a clause in our league that you have to finish better than 9th at least once every three years, which constitutes our league “dynasty pool” where the best team over three years gets all transaction money. So one guy made some bad trades, kept the wrong players, finished no better than 10th in the one cycle, and we bounced him and found a replacement. if you have people who love the league and it is competitive, there will always be a waiting list. Set guidelines and expectations, but let the chips fall where they may. Because you never know how a trade will play out…..

  7. KY said...

    Derek – I don’t see why the league format matters.  Owners get onerous when a team ends up worse off then it was.  If trading Pedroia for two closers was actually a good idea for the owner of Pedroia I don’t thin anyone would get upset.

    There is also the fact that there is a reason they get upset.  Because they do not value trading as a skill and therefore a reason to win a league.  They may simply be jealous of the owner who performed a good trade, but that would appear to call every person who dislikes this type of trade unable to be objective or comprehend being beaten in a market.  Are you ready to make that claim?  If not, then they must have a point. 

    Since fantasy baseball need not be identical to MLB is does not need to have trades at all, its a matter of preference.  How your league handles trades is your own personal way of doing so, there’s no correct opinion, its a matter of what you value and therefore set up your rules to reward.  Because that is what you like to reward, not because it is better then another way.

    Phil – In the real world it is much tougher to tell that you bought a lemon used car then it is a 5 FIP pitcher.  The buyer is not always able to beware.  If there is a dangerous chemical in your child’s toy, or your latest ground chuck how could you personally tell?  You have a choice, you can either have faith that the government tested your beef, or, you can not buy beef.  I do not know if it is wise to compare people’s perceived whinyness to this situation.  Do people in the real world really complain every time they get beat in a market?  Or it simply that you mostly hear about the people that feel they were beaten unfairly?

  8. Derek Ambrosino said...

    KY,

    First, I’ll let you tackle Phil’s point, that seems to be a good start.

    As to why league type matters, I’d say it’s a minor caveat (in the Pedroia-trader’s favor in this case) because in roto you can’t just punt saves and spread that extra value over your other categories as a strategic play. Theoretically, you might be able to argue that in a league with certain characteristics, having an elite 2B is clearly more valuable than two C+ closers who may not help your rate stats.

    I think you’ve hit on something about people not valuing trading as a skill. Personally, I have to make a concerted intellectual attempt to take the long view with these things. I’m totally open to unregulated trade, etc., but I do always grumble when somebody pulls off a great trade, partially because it is the part of the game I’m least adept at, for reasons I’ve mentioned here before. I defend the whole practice and advocate for its expansion because that’s what I believe, even though it’s the tool that I use least well.

  9. Derek Ambrosino said...

    Dubboys,

    I think you make a good point in referring to moves in the way they impact the standings. Many people get too hung up on evaluating trades in the vacuum of objective value, when what really matters is the context of the team and league. You can lose the value of production side of a trade and win the points in the standings side – I think that’s what this owner did. …The thing is, if you do that too often, you create a ceiling for yourself. It’s quite possible to make a series of moves like this that will move you from 11th to 8th, but if you keep giving your most valuable pieces away for 85 cents on the dollar, you erode your chances of cracking the upper echelon of teams. Essentially, Pedroia was a valuable piece to assemble a tool that gets you to the top of the tree, which this owner traded for a ready-made tool that efficiently grabs the low-hanging fruit, but doesn’t do much else.

    Re: the “you never know” point, I agree in theory, but you can also argue that at some point a line does have to be drawn. What if this trade as made with Pujols instead of Pedroia? Does that “cross a line?” Sure, any player can get hurt or have a terrible season, but don’t you have to play the odds? No matter how free market you are, there’s a line that, when crossed, makes you think about the benefits of regulation. And, we can all cite season-ending injuries, 2010 Jose Bautista seasons, and 2009 David Wrights, and in some cases they work out. But, isn’t it also meaningful that in the vast majority of scenarios they do not. A month into last season, wouldn’t a trade of Jason Bay for Jose Bautista have at least forced you to second guess your laissez faire stance? And, should the fact that it worked out be used as evidence to override that feeling?

    This is kind of what is meant by the (oft-confused) phrase “the exception that proves the rule.” The fact that we can cite anecdotal cases, in which the seemingly “unfair” prove to be fair, establishes the fact that there’s some point at which is a deal is inherently unfair in nature, regardless of future outcome.

    The issue is that line is subjective. By deregulating, you are trusting that the league will not cross that line on its own. And, since the line is subjective, sometimes some people in the league will think that the line did get crossed (they’ll claim it crossed the point where they lay their lines), while others don’t think the line was crossed. That’s when the commish is put in a tough spot.

    I think that even if the league agrees to “no regulation,” nobody is going to complain if the commish steps in and overturns a Albert Pujols for Francisco Cordero trade.

    …It’s like Fannie and Freddie, technicially these loans were not gov’t backed/guaranteed, but there was an overwhelming perception and assumption that they were, and when push came to shove, the gov’t actually steppend in. The commish is going to come in to bail out Albert Pujols, but he might let Dustin Pedrioia deal with his own fallout. Is it “fair?” I don’t know, and I’m not even sure if “fairness” is the essential barometer we have to use. …Fair in what sense? Is it best for the league as a whole?

  10. Dave said...

    To address your broader point, while no one likes to told they can’t do something and all things being equal the preference should be for more personal freedom, the impact of bad trades on fantasy doesn’t compare to the impact of bad behavior on financial markets. 

    IMO financial markets need regulation, in particular “innovative” financial instruments.  The events of the past two-three years (and throughout history to be hones) have highlight how “smart” people were not so smart.  Financial markets are not ideal and never will be.  Accurate information will never always be freely available and neither will insider trading ever be completely eradicated. 

    Getting back to fantasy baseball, look at in the broader context it’s a bad trade.  But fantasy baseball leagues are far from ideal markets.  The bigger issue to me isn’t that a bad trade was done because of market inefficiencies.  But that saves, a fairly arbitrary and not that meaningful in real life stat, is so significant.  It’d be better to avoid market inefficiencies by eliminating the category from fantasy.

  11. Derek Ambrosino said...

    Dave,

    To fulfill my quota of pseudo-philosophical cliched musings, let me state that the map is not the territory. While you may object to the inclusion of saves as a category (and for plenty good reason), avoiding their inclusion would not have necessarily prevented such a trade. Fundamental misunderstandings of the market are not cured by swapping commodities. The same owner could have just as easily made a shortsighted move to chase FIP at the expense of wOBA.

  12. Phil said...

    What you refer to as “complex” financial instruments, rarely are. In America, if someone loses money, they have to find someone to blame. Hiding behind the instrument being deceptive or too complex is akin to trading for a pitcher with a 3.00 era but a 5.00 fip, then accusing your trade partner with having been dishonest when the pitcher turns into a 5.00 era pitcher.

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