Wednesday, August 22, 2012

How to Spend Your Allowance

A house is on fire.  The fire department is afraid it will spread to other houses. A local politician is called to observe the fire in order to assess the damage in hopes he can do something to prevent future fires. Here is the problem: rarely is it smart to throw money at the problem because money burns as well as most other forms of kindling.

Due to the lack of a salary cap, Major League Baseball teams are allowed to pay their players as much money as they want. It allows for great diversity amongst the teams' total payrolls. For example, the New York Yankees spent $197,962,289 on their players this season. The Yankees generally spend the most money of any MLB team on their players, and with numerous playoff appearances and World Series titles they reap the benefits on the field. In comparison, teams like the San Diego Padres, Tampa Bay Rays, Pittsburgh Pirates, and Oakland Athletics find themselves consistently at the bottom of payroll lists.

I began looking through the payroll lists* in order to find a trend- some pattern that would prove interesting. First, I used which uses simulations and models to estimate the number wins and losses for each team at the end of the season. Next I plotted each team's 2012 payroll against the number of wins that the guys at Baseball Prospectus estimate each team will have by October 1st. I plotted the best-fit line and even calculated the R squared value. Here are the results:

If you would like to see the data used in this graph click on this: LINK

My sole conclusion from the graph and the results collected is that there is very little connection between a team's wins and the amount of money they spend to put together a team. The R-squared value indicates only 7% of the variation of wins is explained by the results The lowest point represents the Houston Astros. That team has spent the third fewest dollars, and due to their abysmal results, find themselves in the cellar. Here are some other interesting facts that came from these data:

  •  The Yankees have the highest payroll in the Majors, and pay about $2,062,107 per win 
  • The Phillies have the 2nd highest payroll in the Majors, and pay about $2,266,739 per win
  • The Padres have the lowest payroll in the Majors, and pay about $781,396 per win 
  • The Athletics have the 2nd lowest payroll in the Majors, and pay about $661,559 per win  
  • Finally, the Nationals have the best record in the Majors, and the 19th lowest payroll. They pay about $823,240 per win
Without a doubt, the Nationals have got the best return on their investment this season. That conclusion makes some sense in that the Nationals have numerous young players without large contracts who have a lot of talent and have performed at a high level this season. In comparison, the Philadelphia Phillies have an extremely high payroll and have severely underachieved in the National League East. 

So, does money win championships? The answer is sometimes. Does a low payroll filled with young players win championships? Same answer, sometimes. Overall the only question to ask that doesn't incur a similar answer is, "What is the best formula to use?" The only answer to that question is build a smart team. If management makes intelligent decisions that balance spending with results and predictions, it gives an organization the best chance to succeed. Oh, and don't forget about luck. 

*All team payroll data was taken from USA Today's tabulation of sports team's payrolls (Link)

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