Why Smart GMs Do Stupid Things

Today’s column is another brilliant offering from Steve Walters, a Professor of Economics at Loyola University Maryland.  Steve grew up in Massachusetts – otherwise known as the “Cradle of GMs” – and is thus a member of Red Sox, Celtics, Patriots, and Bruins Nation. He has published academic research on sports and economics, worked as a consultant in baseball, and has written for The Sporting News.

 

Frank Costanza:  “What the hell did you trade Jay Buhner for?! He had 30 home runs and over 100 RBIs last year. He’s got a rocket for an arm. You don’t know what the hell you’re doin’!”

George Steinbrenner:  “Well, Buhner was a good prospect, no question about it. But my baseball people loved Ken Phelps’ bat. They kept saying ‘Ken Phelps, Ken Phelps.’”

Seinfeld, “The Caddy” (season 7, 1996)

OK, we all “go Costanza” from time to time.  It’s part of the joy of being a fan to second guess team management (usually at high volume) and fantasize about what we’d do if we sat in the General Manager’s chair.

In our heart of hearts, though, we know this is foolishness.  The pool of talent attracted to the sports business is incredibly rich and deep.  Clawing your way to the top of any team’s organizational chart must be an epic struggle involving long days, endless study, and relentless pressure for results.  It’s reasonable to assume that those who survive this brutal competition are the best and brightest, their big brains crammed with relevant knowledge and experience and their motivation levels off the charts.  If there’s an efficient market for executive talent anywhere, it must be in sports.

Except… there sure seems to be a lot of evidence that some of the industry’s highest-paid execs, well, “don’t know what the hell they’re doin’.”

Now, understand, I do not mean that GMs aren’t smart, knowledgeable, and motivated.  I’ve never met a GM who wasn’t supremely talented (and as a consultant I’ve worked for a couple, and as a feature writer for The Sporting News a few years ago I’ve gotten to chat with many more in clubhouses and press boxes).  I am emphatically not suggesting that the average fan – and certainly not Frank Costanza – could improve upon the average GM’s performance.

What I do mean is that there are some flaws in the market for sports management talent – and especially in the GM market.  As a result, some who are elevated to top jobs aren’t ready for prime time.  Often, the “tools” that get someone the job are useless for executing it; other skills, undeveloped in the rise up the ladder, become far more important on the top rung.  Some have ‘em, some don’t.

Let me offer three observations about how this market works (or doesn’t), with some sketchy economic analysis of why and a few relevant illustrations.

1.  It’s not what you know, but who you know.

This is an exaggeration, of course.  No one who has risen to a position of any responsibility in the sports business lacks experience and knowledge.  But with a vast pool of such competitors seeking advancement, the decision about exactly who to advance will often hinge on (a) a mentoring relationship with someone well-connected in the business, or (b) membership in a successful organization.

It grieves me to say that.  As an economist, I generally tout the “meritocratic” nature of the market system.  Profit-seeking owners have an incentive to use the best info available to hire people who are most qualified (and, so, maximize the chances that they’ll achieve their objectives, whether championships or high profits).  Giving preferences to those who are “wired in” runs counter to that goal.

In the real world, however, owners face an information problem:  lots of job candidates, on paper and in interviews, will appear promising – but their real value going forward is uncertain.  At the least, a strong recommendation from a “trusted source” can be a tie-breaker.  Alternatively, coming from a team with a winning record – even if the applicant’s contribution to that record is uncertain or un-measurable – can tip the scales.

The best recent example of a well-connected incompetent might be Bill Bavasi, one of two sons of the late Buzzie Bavasi (who GM’d three teams from the ‘50s to the ‘80s) to enjoy long careers in baseball thanks to “the network.”  Indeed, Buzzie himself got into the business thanks to connections:  his college room-mate just happened to be the son of baseball’s commissioner at the time.  Daddy gave Bill his first job with the Angels; in 1994, he was in the right place at the right time and became GM when the mercurial Whitey Herzog exited.  After three last-place finishes in six years, Bill was fired, but in 2003 he resurfaced as GM of the Mariners – he’s got the good blood lines, after all – and presided over four more last-place finishes in five years.  He’s now an assistant to Cincinnati’s GM; look out, Reds fans.

It’s also possible to ride a “hot hand” or a winning rep into a top job.  J.P. Ricciardi, for example, was a lieutenant to Oakland’s Billy Beane when hired to revive the under-achieving Toronto Blue Jays after the 2001 season.  Beane’s Athletics had just won 102 games on a shoe-string budget; his brilliance would soon be chronicled in Michael Lewis’s MoneyBall.  Surely Ricciardi was a rising star – except that his Jays have continued to under-achieve.  In part, this has been because…

2.  The Peter Principle is alive and well in pro sports.

Dr. Laurence Peter’s somewhat tongue-in-cheek argument that “in a hierarchy every employee tends to rise to the level of his incompetence” (or, alternatively, something that works will be used in more challenging applications until it fails) applies with great force in the GM market.

Obviously, GMs must evaluate talent, so most have played the game, scouted it for many years, or both.  Players and scouts can judge the horseflesh; they can distinguish a curve ball with big-league potential from one without it, or eyeball an infielder’s hands and footwork and judge whether he’ll hold his own on a major league field.

The problem is that once you’re a GM, you not only have to judge talent, but value it economically – i.e., “put a dollar on the muscle.”  This is the domain of subtle trade-offs.  Here, it won’t be enough just to say “X has better bat-speed than Y” or “Z needs to come up with an out pitch.”  Putting together a roster that will contend is to scouting as college calculus is to third-grade arithmetic.

One of the most famous trades in baseball history exchanged a power-hitting right-fielder (Rocky Colavito) for a high-average shortstop (Harvey Kuenn).  It was endlessly controversial because it involved trade-offs that those unguided by quantitative analysis were completely unprepared to judge:  What’s the defensive value of a corner outfielder vs. a middle infielder?  How do some homers compare to many more singles and doubles?  Making deals without knowing the answers to these and other key relative-value questions is like playing Russian roulette with your team’s destiny.

And in the modern, free-agent era, you have the complication of money:  Most GMs are (unwisely) given a fixed payroll budget and told to figure out how to get as many wins as possible from it.  The number of trade-offs they have to evaluate thus grows exponentially.  Plus, their expenditures will, in part, result from their own negotiating skill – or lack of it.  There’s nothing about playing the game or scouting that makes one a savvy negotiator.  I recently heard (from a trusted source) that when a certain pitcher was on the market a few years ago his best offer was a three-year, $18 million contract – until a GM desperate to shore up his rotation offered four years, $42 million.  Sold!  And many millions squandered that could have been used to sign other useful talent.

Ricciardi’s track record as a scout and junior exec may have been stellar, but as a GM he’s been mediocre at best – especially on the economic front.  A supportive owner allowed him to run the Jays’ payroll up from $51 million in 2003 to almost $100 million last year (though with a weak looney and a recession this year, it’s back down to $80 million); the result has been one second-place finish, four thirds, two fourths (counting this year), and a last.  Per Forbes magazine’s estimates, the Jays have shown red ink in three of Ricciardi’s seven years at the helm – which is actually pretty hard to do, given MLB’s generous revenue-sharing system and, for a few years, large subsidies for “currency equalization.”

It’s worth noting that Ricciardi has squandered millions of his owners’ money in two ways.  Sure, he’s wasted truckloads on some thoroughly mediocre players (and I leave it to Jays fans to supply the full list), but he’s also failed to deal players when their value in Toronto has fallen far below that elsewhere.

In other words, Ricciardi – and he’s far from alone here – is ignorant of two basic facts of economic life in baseball.  As my colleague John Burger and I showed in a 2003 article in the Journal of Sports Economics, players are worth much more (in terms of the revenue they will generate for their teams) in large markets than they are in small ones, and more to contenders than to also-rans.

This year, the Jays rode a few surprising performances to contention in the early going, but eventually settled back to their customary second-division status.  As a result, the expected revenue contributions of all their players went down sharply, and this should have made Ricciardi an eager dealer at baseball’s just-concluded trading deadline.  His roster was stocked with veterans getting big-market, contender-status salaries who will recoup a fraction of their costs as the Jays chug to the finish line.  The best strategy in such circumstances (well and frequently executed by Billy Beane) is to move this high-priced talent to markets where it is most highly valued in exchange for prospects who are cheaper (and so generate no red ink) and give the team a chance to contend in future.

But while Ricciardi loudly offered his white elephants for bids – especially his top pitcher, Roy Halladay – he could off-load only one of them, oft-injured third baseman Scott Rolen.  Fans generally applauded this inability to close deals, in the evident belief that any money thus squandered would come out of ownership’s hide, not theirs.  True enough – but the millions wasted in this way will not be available to sign or develop talent that may make fans much happier in the long run.  And, so far at least, Ricciardi’s lack of judgment and/or negotiating skill does not appear to be endangering his job – which reflects the fact that in baseball, at least…

3.  Nice guys finish last, but get their contracts renewed.

Baseball (like all major sports) is a monopoly.  This helps insulate it from the consequences of big mistakes – but also breeds a certain “clubbishness” and, even, a tolerance for bias.

Historically, of course, the best evidence of the latter is the fact that sports were racially segregated for so long.  In a more competitive environment, perhaps owners would have broken the “gentleman’s agreement” (and how’s that for an ironic name?) that kept talented (and cheap!) African-American players out of organized baseball from 1888 ‘til 1946.  But even today, owners seem indifferent to the possibility that women – who now hold exactly zero of the GM positions in major sports – just might “have the essentials” to judge talent, evaluate trade-offs, negotiate deals, and build profitable winners.

In a club, the members often value congeniality.  Life is easier for everybody if the other members are “nice” – i.e., have few rough edges or annoying personality traits, no matter what else they bring to the table.  In baseball, you can establish your congeniality in many ways:  e.g., compliance with an interventionist owner, glibness with the press and public, or slickness in handling underlings.

Such traits might actually help a GM succeed, of course.  What is unclear is how they stack up next to other “tools” — analytic insight, negotiating savvy, willingness to take risks – and why they seem to be central elements in some teams’ employment decisions.

Consider the case of Paul DePodesta, another of Billy Beane’s lieutenants who won the Dodgers’ GM job in the Spring of 2004.  DePodesta had not only earned a Harvard economics degree (which means he knows something about evaluating trade-offs) but also served an apprenticeship with a winning organization; he was a key figure in MoneyBall.  But even as his Dodgers marched to the playoffs in ’04, he was (shudder) unpopular:  old-school Dodgers execs resented this egghead in their midst, and he failed to cultivate the LA press.  In short, he wasn’t a suitable member of the club, and absent a sympathetic support system, a disappointing ’05 season got him canned.

In my experience, a GM’s failure to stroke a club’s bureaucracy or the media (some of whom are not above swapping favorable mention in print or on air for access to news) can be fatal to a career, despite his team’s record or its bottom-line.  Being well-liked by all and sundry, on the other hand, can lead to multiple opportunities to screw up a franchise.  Again, part of this goes back to observation #1 and the info problem faced by owners:  If it’s hard to judge someone’s underlying ability as an exec, it seems rational to factor in how well-liked he is by those he’s worked with.  In MoneyBall parlance, though, this is like drafting a prospect who “looks good in jeans” but might not be able to actually play the game.

In sum, despite the competitiveness of this labor market, there’s ample reason to believe that Frank Costanza had a point.  So if the front office of your favorite team seems dysfunctional and inefficient, maybe that’s because it is.

- Steve Walters

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