Friday, December 28, 2012

Cody Hodgson, Zack Kassian, and Akerlof's Lemons

by Rory Johnston

I've been meaning to write for a while about the trade market in professional sports, and with the depressing monotony of the NHL lockout, now's maybe a good time for it. I've been thinking a lot about the problem of information asymmetry in player trades.

This all stems out of a classic economics paper titled "The Market for Lemons: Quality Uncertainty and the Market Mechanism", published in 1970 by George Akerlof, who eventually won a Nobel Prize (shared with Joseph Stiglitz and Michael Spence) for his work on the subject. In essence, Akerlof's paper describes the "information asymmetry" in the market for used cars.

A "Lemon" is a used car that has hidden problems that are not instantly visible at the time of sale. The seller will often know about the defects, but the buyer does not. This is an "information asymmetry". To the seller, the car might be a piece of junk he'd happily sell at $1000; the buyer feels that a properly working car would be worth $3000.

Buyers, however, will be aware that lemons exist. They might know that there's a 25% chance a car of that particular model and year is a lemon, and thus there's a 25% chance the car is actually worth $1000. If neither buyer nor seller can identify a lemon, the buyer would be willing to pay a price of just $2500, to account for the possibility of a lemon.

Akerlof's paper identifies the problem: sellers will usually know if their car is a lemon. If it's a good car, then he knows it's worth $3000. But the buyer won't pay that price; so the only cars sellers will put on the market are the lemons - and once the buyers figure that out, they're going to want to pay even less. As the odds of getting a lemon increase, the market price will eventually slide down to $1000.

Hopefully you can see where I'm going with this. In the sports trade market, teams have a considerable asymmetry of information. It has become clear that the Canucks knew the full details on Cody Hodgson's injury issues, and about his disputes with the coaching staff. What's more, we saw that Hodgson was given premium offensive zone ice time in an effort to boost his trade value. The Canucks knew more about Cody Hodgson than anyone else - and after taking it all into account, they thought he wasn't as valuable as other teams thought he was.

Obviously, comparing hockey players to used cars is an oversimplification. Plenty of "non-lemon" players get traded because team have lineup and financial constraints that require such moves. Nevertheless, GMs should be very wary of trade offers - in any sport - that seem too good to be true, or of players that opposing GMs are overly keen to unload. Scouts can see weaknesses on the ice or on the field, but they don't get as much chance to evaluate a player's makeup or talk to team doctors and training staff to get all the injury details.

When thinking about "lemon" trades, I can't help but think back to the Blue Jays' ill-fated trade for Mike Sirotka in 2001. The Jays gave up a disgruntled David Wells for Sirotka, a left-handed pitcher who had just won 15 games for the White Sox. Although he passed his initial physical, Sirotka was diagnosed with a torn labrum at Spring Training and would never throw another pitch in the majors. It's not clear how much the Sox knew about Sirotka's injury, but there were a lot of suspicions that they had pulled a fast one in the deal.

My interest in the "lemons" issue was revived in the aftermath of the R.A. Dickey trade, when it came out that prospect Noah Syndergaard, who was part of the package going to the Mets, had tweeted a homophobic slur earlier this month. Did the Jays see the tweet and decide it was the last straw? I had been initially surprised the Jays were so willing to include Syndergaard in the deal, but maybe they saw him as a bit of a "lemon" in terms of makeup. Others (regretfully, I can't find a link to where I first saw this) pointed this out and suggested that after the Yunel Escobar incident, it was best to steer clear. On the opposite side, Dickey's Christmas party complaints got a lot of attention and could have helped the Mets' decision to move him. By all accounts, he's a nice guy despite his quirks; or are there other things that the Mets were worried about? For all we know, they may have determined that his 'fast knuckleball' would not age as well as the slow knucklers thrown by Wakefield, Niekro et al.

There are a few conclusions to take from all this:

1. A disproportionately large number of lemons will be available in trade

If a player's problems are known only to the team that controls him, they will be more likely to want to move him while his trade value exceeds his normal value. As a result, there will be an unusually high number of 'lemons' on the market, so buyers will have to be extra-vigilant.

2. It will be a lot harder to acquire non-lemons

Even if trading a player or prospect would make sense in 'hockey' terms (or 'baseball', etc), teams will be reluctant to move players who they aren't worried about. Putting a player on the market will immediately raise suspicions that something is wrong; a team may have a hard time getting full value in trade.

3. Teams have to do their homework

The Blue Jays got a lot of flak for missing Sirotka's injury in his initial physical; teams should be very wary of trading for players who have been recently injured, suspended, or had his role on the team change. Is the player being 'showcased' to pump up his value, as Hodgson was?

4. Don't advertise your lemons

Shopping a player around will immediately raise suspicion among savvy GMs that he might be a lemon. Teams would do better to invite the other GM to ask for the player. For example, I can picture Alex Anthopolous on the phone with the Mets:

"Not enough? I'd be willing to add a pitching prospect to the deal. No, not Aaron Sanchez... Syndergaard? Gee, we really thought of him as untouchable, but for you..."

5. Buyer beware

As fans, we all like to see trades and get excited at the thought of seeing our team add the final piece of the puzzle. Yet so many trades turn out to be disappointments. Teams should rely on trades sparingly because of the chance that the player acquired won't turn out to be exactly as advertised.

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