The Endowment Effect is Your Enemy

Welcome to today’s Ottoneu Fantasy Corner. Our topic applies to people in all leagues so by all means, settle in, grab yourself a mug of tepid tea, and prepare to be educated. While this post applies to any fantasy owner who makes trades or has a keeper decision looming over their head, I will focus on Ottoneu leagues. The keeper deadline for Ottoneu is the end of January 31, so there isn’t much time left to make up your mind about those marginal keepers. There’s no better time than now to learn about the endowment effect and how it can result in sub-optimal decisions.

Put simply, the endowment effect is when somebody ascribes extra value to an asset simply because they own it. When you pause to think about it, this happens all the time in fantasy sports and is most commonly visible in trade discussions. It also applies to keeper decisions, especially in a league like Ottoneu Points where the value of a player is not readily apparent. If you would like to learn more about the endowment effect, the Wikipedia article on the topic is surprisingly cogent (the economics topics usually aren’t). For the purpose of the article, I’ll just state that there is such an effect, it affects fantasy leagues, and it’s specifically relevant to trades and keeper decisions.

The Endowment Effect in Keeper Decisions

Not all keeper decisions are created equal, but most owners have to make at least one iffy choice. Most leagues have constraints on the number of keepers, costs associated with keepers, or both. An owner has to weigh those constraints against the perceived value of the player in order to reach a decision. This is where the endowment effect can wreak havoc on roster construction.

Owners who keep a small number of players at no cost are off the hook. There are other economic effects that will bias your decision, but the endowment effect isn’t one of them. At the other extreme are dynasty leagues and Ottoneu, which have no constraint on the number of keepers and a very modest increase in cost. Most leagues are somewhere in between.

I did some snooping earlier in the offseason to see what kind of keeper decisions owners have made in Ottoneu Points leagues. I joined the FanGraphs Staff League II this offseason with minimal Ottoneu experience, so I wanted to see how other owners handled their keeper decisions. What I found was that owners kept waaaay too many players. They kept marginal players, they kept obvious cuts, and they did so at an astounding rate. I can hazard a guess as to why. Between the massive budget and cost savings from cheap breakouts, there’s a lot of reason to say f— it and keep any marginal player. And of course, the endowment effect subtly expands the pool of marginal players from the actual margin to the point where owners paid $5 or more above cost.

To be fair, some owners pursued this strategy intentionally. They predicted inflation in the draft. What I observed was that inflation was inconsistent from league to league and even within drafts. Some leagues did experience inflation – especially on the best players. Others, like the league I’ve joined, saw deflation.

There is also the case of position scarcity to consider, one that I’m grappling with right now in regards to my $16 Jurickson Profar. I initially acquired Profar as a throw-in to a trade: my $24 Adam Jones for $8 Danny Salazar, $8 Corey Kluber, and Profar. I didn’t really consider Profar a keeper when I pushed him into the trade, but I needed to do further analysis, and at the time, I was still worried about middle infield depth.

Upon receiving Profar, I penciled him in as my starting shortstop and never really paused to question why until a few days ago. That was when I noticed that I projected him to be worth about $7 as a shortstop, $6 as a second baseman, and negative as a third baseman. The multi-position eligibility may be worth as many as $5, but surely no more than that. There are two reasons I might keep Profar, scarcity and the endowment effect. I’ll probably make a last minute decision based on the player pool, but I know that the correct answer is to cut him.

You probably have your own Profar(s). Somebody who you’re thinking about keeping because…well…you already own him and it would suck if you let him go and he turned in a big year. Here is what I suggest, separate your list of keepers into the players with obvious surplus value and players who are priced near cost. I get a list with $28 Adam Wainwright, $8 Salazar, and $8 Greg Holland on the surplus side and $29 Chase Utley, $16 Profar, and $19 Aroldis Chapman on near cost side. Then question your motives for each of these marginal decisions.

Do I have a reason to keep Utley for $29. My projection is substantially below $29. His upside may exceed that value, but the likelihood of a vintage season is minuscule. Once I’ve gone through all the reasons, it’s clear that I would only keep him because I already own him. Think of it another way. Take your projections for Utley, give him a new name (let’s say, Pasca Van Buren), and ask yourself, “is there any reason I would draft Van Buren for $29?” The answer is no, so it’s time to cut him lose.

For guys like Profar and Chapman, it’s so much harder to identify if you’re being influenced by the endowment effect. There are identifiable circumstances when those players could be drafted at those prices. A trick to see if the player is worth keeping is to engage a couple rivals in trade talks. Target an obvious keeper and see if they’ll talk about a package headlined by Profar or Chapman. If anything, these owners will be suffering the endowment effect with their own players, not yours, so if they’re willing to talk shop then you probably aren’t crazy to keep the players.

It is possible to over think things. Don’t agonize over your keeper decisions as they probably aren’t going to make of break your season all by themselves. Marginal decisions are risky by nature. Sometimes you’ll come out looking like a genius because you kept Josh Donaldson for $3 based on a strong September, but other times you’ll just waste $20 or worse, use a player well past his expiration date.  A major league fielder is expected to make all of the easy plays and some of the hard ones. The same goes for good fantasy owners, if you make the easy plays and some of the hard ones, you’ll win your share of leagues.

The Endowment Effect in Trades

Owners pass on mutually beneficial trades very often because of the endowment effect. I began studying behavioral economics in 2008, so I have been wrestling with ways to overcome the effect and win trades for awhile. When I truly covet a player, I usually offer to overpay. That goes doubly in the offseason, when I can try to make up for lost value with a strong draft.

I remember after Matt Moore‘s initial breakout in 2011, I offered a boatload of talent in exchange for him (not in Ottoneu). In retrospect, the owner should have made the trade, even though Moore cost just $1 at the time. I can understand why he didn’t, there was talk of Strasburg level talent plus I had pilfered an $8 Jose Bautista from that owner the previous offseason. But it was probably the endowment effect that ultimately blocked the trade.

There are usually many reasons not to make a trade. The endowment effect is the worst of them. Some owners like to include why they think an offer is good for you. Usually it’s hogwash, but sometimes it’s spot on. Whether such a description is included or not, give a moments thought to the potential benefits, the losses, and also how it affects your rival relative to your own standing. There’s no point improving your roster by some amount if your rival improves more and leapfrogs you in the process. It’s ok to pass on a beneficial trade simply because you don’t need to make a trade, but you shouldn’t pass on a trade that categorically helps you because you’re overvaluing your own assets.




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Brad is a former collegiate player who writes for FanGraphs, The Hardball Times, RotoWorld, MLB Trade Rumors, and The Fake Baseball. Follow him on Twitter @BaseballATeam or email him here.

29 Responses to “The Endowment Effect is Your Enemy”

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  1. Pat says:

    You’re well endowed, Brad.

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  2. Carson Cistulli (not) says:

    You got Kluber AND Salazar in the same trade??

    Sigh!

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  3. dacure says:

    I’ve discussed this with my friend from home and have realized some endowment effect is perfectly rational (note: I love behavioral economics and dislike people looking for any scrap of rationality to save traditional econ). I play in a hometown league where I am in constant contact with every member and I’ve realized not all homeruns are created equally. When I have constant arguments in the preseason that Fransisco Liriano is going to bounce back and dominate for the Pirates his strikeouts are no longer equivalent to Cliff Lee’s. In this style of play utility is derived from a combination of beating my friends, and proving them wrong. Again, I understand this article is designed under the assumption that winning is the only thing that drives utility and it should be written this way. I just think it is interesting to think about the additional bonuses that come with owning a favorite player or someone who you consider your “find”.

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    • KSSoxFan says:

      I still have an affinity for Mat Latos, even though I traded him 2 years ago, after I “called” his breakout rookie year and took a flyer and rode him to the finish…

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    • Brad Johnson says:

      That’s an interesting article topic, utility that isn’t tied to winning.

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      • byron says:

        I wonder if it wouldn’t be fun to play an Ottoneu league as a perpetual seller. Just see how ridiculous of a prospect roster you could put together, then flip em for more prospects. You’d never win, but you’d also never have a year where you finish 7th and check out by July.

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      • tylersnotes says:

        I think the bonuses of favorite players or “finds” should either be ignored as the exact issue the endowment effect is discussing, or built into your valuation for the player. In keeper leagues, there are 2 questions driving a player’s valuation:
        1- what do you believe his performance next year will be worth?
        2- what do you believe his value would be at auction (or draft)?

        The difference between these 2 questions doesn’t change based on the behaviors of other guys in your league. If you believe Liriano will be worth $25, but you believe his value at auction will be significantly cheaper, then now he’s a “find.” If you believe Liriano will be worth $25 and so does everyone else, he’s just sold at value.

        The value of the player can incorporate these ‘intangible’ social benefits. To illustrate: I’m in a league with a guy who will ALWAYS overpay for phillies prospects. I saw maikel franco as a high upside, high risk guy without a clear path to playing time, but I increased the value i assigned to him because in addition to my projection for his value for MY team, I saw his trade value as being higher than comparable players.

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  4. Kris says:

    Brad, I’m not entirely sure that this is the endowment effect at work. I agree with a lot of your sentiments, but it’s hard to distinguish the endowment effect from differing valuations of the actual player. If a player is on your roster, that’s generally because you value him more than the other fantasy owners. Owners who inherit rosters generally are much more liberal with their trading.

    For me, it’s not simply owning a player, but drafting a player that contributes to overvaluing him.

    Players that I drafted are much tougher to pry away from me than players that I’ve acquired via trade or picked up via the waiver wire. I would imagine that’s because most of my time spent looking at baseball/football is spent before the draft, so I end up valuing these assets the most because I’m the most familiar with them.

    I think the same thing holds true with *actual* baseball general managers and I’d love to see some kind of study on this. General Managers are probably more likely to trade assets that they acquired via trade or their predecessor acquired, than players they’ve drafted.

    Personally, I think the best way to get value out of trades is to targets the low-cost acquisitions. If someone acquired an asset for cheap, they’re more likely to still view it as a cheap asset.

    Maybe this is the endowment effect, I’m not sure.

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    • Brad Johnson says:

      No, you bring up a good point. This is another effect and I’m blanking on the name (I have been for days and it’s driving me nuts!!!). It’s been found that players who have been dropped once are more likely to be dropped again both in fantasy and real baseball, even when you control for performance.

      It would probably be more correct to say that it’s probably not just the endowment effect at play. That said, I’ve seen too many instances where an owner bids $15 on a player in the draft, loses that bid, and only offers $10 of value in trade. We’re talking a sample of N > 100 and that’s just on players that I’ve won since starting auctions four seasons ago. The commonness of that phenomenon points to the endowment effect.

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      • Jeff says:

        There are a couple of factors here, one would be the advocacy effect. We value things that we advocate for, things that are representations of our logic/decision making/intelligence.

        The other part is the disposition effect, which leads to owners holding onto their losers (often for far too long) until they can recoup their original investment.

        I really enjoyed this article. I write about this stuff (behavioral econ, psychology) as it relates to fantasy baseball at the website in the header.

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    • byron says:

      Kind of an offshoot from the Winner’s Curse.

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      • Andrew A says:

        how does the Winner’s Curse apply to fantasy baseball auctions when, by definition, there are $2600 worth of players in every auction (10 teams, $260 budget)

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      • Brad Johnson says:

        Players are fixed value assets just like oil wells. And just like oil wells, we don’t know how much they’re worth until all is said and done. So the winner’s curse applies until owners realize that they need to conserve funds.

        The fixed budget only ensures that players drafted in the late rounds will go cheaper than they should, since owners will use extra funds buying players in the early rounds.

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      • Andrew A says:

        that is inflation, not winner’s curse

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      • Brad Johnson says:

        Perhaps I didn’t explain it well enough. Owners overbid on assets early in the draft because they overestimate their production. Anytime you overestimate a player’s production and pay for it, you are suffering the winner’s curse. This happens all the time early in the drafts.

        Inflation could kick in during the mid-rounds when some owners realize that by not paying for the overpriced, high quality assets, they’ll be stuck with extra dollars at the end of the auction. So they ensure that they win their favorites from the third and fourth tier of players with overbids.

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      • byron says:

        That’s more complicated than what I meant. I just meant, in an auction, the owner who values a player highest is likely to end up with him because they’ll pay the most. So if you’re looking to trade a player you drafted, chances are no one else values him as highly as you, or they’d have drafted him.

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  5. Kevin Towers says:

    I don’t believe in the endowment effect

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  6. Teddy Wolvesevelt says:

    Keeping an $11 Khris Davis in an Otto points league. Smart or endowment effect?

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  7. Jabronies says:

    One other reason for holding on to guys that may not be worth their money is the fear that the player you drop will go for too much in the auction and then you will have no other options. For example I cant decide on a 8$ Bonifacio in Otto 5×5. as a “super-sub”, we will not earn 8$ barring major playing time, but I dont think there will be an abundance of 25 SB guys that I can slot into multiple position available in the auction. I guess the right move would be to drop him, but its toooo hard!

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    • Andrew A says:

      but if you perceive a shortage of 25 SB guys, then you are in fact valuing him at more than $8. There’s nothing wrong with valuing him more than others, you just have to end up being right…

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  8. Jason B says:

    I think there is the opposite effect too – once you draft a guy and he stinks or gets injured, you won’t go anywhere near him ever again. I know I have a long and ever-growing list of guys who screwed me (figuratively speaking).

    (I also have a literal one but I may call those guys again if they take me to Pizzeria Uno or some such.)

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  9. jfree says:

    Endowment effect isn’t all bad. We all attach some irrational value to things. Say by bidding at auction where we begin to focus on winning that player – esp if we have labelled them beforehand (eg – he’s a sleeper). I have never seen an uberrational Spock at any auction. The entire function of an auction is to create a situation where measured rationality gets offset by the emotional tick-tock of the event. Further, I have never seen ANY league where the winner didn’t previously pay more than they should have for someone at auction because they got caught up in the game. The careful valuemax owner never finishes in the bottom half – but never finishes better than 2nd either.

    So if that means you take a few bucks and a few slots off the table beforehand to avoid the bigger risk of going nuts at auction, then that decision is completely rational.

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  10. Spa City says:

    Joey Votto now costs me $50, but I am not sure I have it in me to put him back on the market. Being aware of the EE does not make me immune to it… Frustrating.

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    • Brad Johnson says:

      Votto at $50 is kind of like my Chapman at $19. I was pretty sure I could redraft Chapman for $15 or else use that money in another way if an opportunity presented itself. You probably feel the same about Votto, he might cost $42 in draft (just putting a number on it) and you could use that money another way.

      For Friday, I’m writing up what I learned from my first mock of the season. One of the things I learned is that first base gets iffy really fast. It might be worth it to hang onto that slightly overpriced Votto if you’re worried about 1B depth. Hopefully you have a lot of surplus value built into your roster elsewhere.

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