Wednesday, June 14, 2006

A Lesson in Sunk Costs

The Arizona Diamondbacks seem to be one of the only baseball teams to understand what a sunk cost is. Major league teams routinely keep players on their active rosters not because they are the best available players, but rather because they are paying them lots of money. This usually happens when a player is signed to a long-term deal, with lots of money at the end of contract coinciding with the player's decline. But teams are loathe to cut these players loose, usually giving some sort of reason that they are "paying them too much not to play them" or some nonsense like that. This is nonsense, of course, because due to the guaranteed nature of baseball contracts, the team must pay the player no matter if he plays or not. Thus the money owed to the player is a sunk cost, and if there is a better option available, the money owed to the old, aging, bad player should not enter the decision.

However, yesterday the Diamondbacks (run by former Red Sox assistant GM Josh Byrnes) realized that Russ Ortiz's contract was a sunk cost, that he was not performing anywhere near an acceptable level, and that they had better internal options. So they took the (obvious but rare) step of dumping Ortiz and the more than $20 million still owed to him through 2008.

Ortiz had put up the following line since signing a four-year, $33 million contract with Arizona in the 2004-2005 off-season. (Note that Byrnes was not the general manager who signed Ortiz.) Since signing with Arizona, he won 5 games in 2005 (with 11 losses) and a 6.89 ERA, and followed that up with an 0-5 record in six starts this season, along with a 7.54 ERA. The Ortiz signing was widely criticized when it happened, and it's good to see the Diamondbacks cut the mistake loose. With Arizona tied for first place in a wide-open NL West division, every start they would have wasted on Ortiz would have had the potential to cause them to miss the play-offs. Realizing that the money was sunk and that they had a better chance to make the play-offs with another starter was a positive move for the D-Backs, and a rare display of marginal thinking by a baseball front office.


Blogger Matt E. Ryan said...

It should be no surprise that if a team is going to practice marginal decision making, Ken Kendrick will be the majority owner.

6/21/2006 12:58 PM  

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