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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.