The Los Angeles Dodgers are Major League Baseball's wealthiest franchise. Due in large part to the team's record $7 billion deal with Time Warner Cable for the club's local TV rights, agreed to in 2013. That off-season the Dodgers increased payroll from a 2012 mark of $152 million, to $240 million in 2013. The trend continued, with a payroll climbing to $246 million in 2014, before peaking at a staggering $302 million in 2015. That 2015 payroll was nearly $113 million over MLB's Luxury Tax ceiling of $189 million. That means, with 2015 marking the third consecutive year Los Angeles had exceeded the Luxury Tax threshold, the organization faced a 40% competitive balance tax on the $113 million difference. Now including penalties, the Dodgers 2015 Major League player expenditures exceeded $347 million. For comparison, the New York Yankees, owners of MLB's second highest payroll, spent $236 million, including penalties. That $111 million gap between the highest and second highest payroll, was a greater sum than the entire player payroll for 11 of the 30 MLB franchises.
Now that we've established the Los Angeles Dodgers have money, you can begin to understand why it's been something of a surprise to see the Dodgers routinely outbid for free agents this off-season. An off-season in which a record breaking amount of money has already been handed out, no less. The most notable for the Dodgers was losing All-Star pitcher Zack Greinke to their small-to-mid market division rival, the Arizona Diamondbacks. It's widely accepted that having Zack Greinke on your team is a good thing. It's also been noted that Greinke had been unusually honest in revealing his intentions to sign with whichever team offered him the most money. All signs were pointing to him returning to LA. So why in the hell did the team with all the money not just offer Greinke more money? It would seem their greatest advantage is the ability to do just that when negotiating with a player all of baseball covets. Aside from being just wealthy, the Dodgers front office is perhaps the greatest collection of minds in a baseball operations department we've ever seen. When they do something unexpected, it's safe to assume there's a good reason for it. So, why are they operating like a small market team?
First, it's important to understand what baseball is. Of course, on it's surface, it's a series of athletic competitions. Step back, and it appears as a series of math problems that can be broken down into various probabilities. Everything from the outcome of each individual pitch, to the odds of winning a World Series can be assigned a probability based on past outcomes or a simulation of outcomes. In this case, the relevant information is the goal of every franchise, the probability of winning the World Series. The 2015 pre-season favorites for both best record and World Series odds was the Washington Nationals. Their 94.7 win projection gave them an 86% chance of winning their division, a 94.5% chance of making the Playoffs, and a 17.0% chance of winning the World Series. Only one other team had odds greater than 10%, the Dodgers (92.1 win projection), with 13.4% odds. Eleven other teams entered 2015 with a greater than 2% chance of winning the title. So, being the best team in baseball gives you, roughly, somewhere between a 15-20% chance of winning. Odds only three times greater than a team with only 50% odds to make the Playoffs.
What does that mean? It's easier to understand if you think of baseball as a lottery drawing. In each season is contained a vat of 1,000 ping-pong balls. The Nationals entered 2015 with 170 ping-pong balls, and the eventual World Series Champion Kansas City Royals entered with just 9. Now, a game theory problem; Let's say we're faced with 10 of these drawings, representing 10 seasons. Dividing resources, wealthy teams get 400 balls each, with poor teams getting roughly 266 balls. The max is 175 balls per vat, and the minimum is 5. This is so that odds in any single given season do not exceed 17.5% while demonstrating that loading up to maximize odds for one season is not sustainable. Representing a rich team, the Dodgers, is it better to?:
A. place your 400 ping-pong balls as to maximize your odds early
B. spread them out, putting 40 in each vat
Here's what that looks like:
A. 17.5%, 17.5%, 1%, 1%, 0.5%, 0.5%, 0.5%, 0.5%, 0.5%, 0.5%
TOTAL ODDS: 36.7671476956%
B. 4%, 4%, 4%, 4%, 4%, 4%, 4%, 4%, 4%, 4%
TOTAL ODDS: 38.6094674556%
Note: The math on that was a son of a bitch. Mostly because I haven't been asked to do much math over the past decade, and I didn't have a handy algorithm for that on my computer.
This reveals setting even a mediocre floor is more effective than pouring all of your resources into a couple high-ceiling opportunities. Beginning in 2013, LA began investing heavily in player development and the international market. In 2015, the Dodgers went over their allotted international spending cap by $20 million, reaching a total investment of over $40 million after signings and penalties. They're investing their wealth in organizational depth, not free-agency. This suggests a shift in strategy for wealthy teams away from spending wildly to purchase expensive free-agent talent in an attempt to maximize short-term odds at the expense of long-term organizational health. The new goal is to use your wealth to set a perennially high floor, giving yourself the greatest odds of success over a longer period of time. Not only is this strategy optimal for competitive purposes, it's also far more cost-effective. The Dodgers are already beginning to see the benefits of building less expensive, organization depth. To this point in the off-season, LA's payroll is down over $100 million from 2015, yet they're projected to win more games in 2016. They've set a very high floor. There's no reason for the Dodgers to invest in players like Greinke, making as much an investment in years as money, when the cost is great and the benefit to their probability of winning is marginal.
Baseball is always evolving, and teams are always finding advantages. The newest trend may be mediocrity. It's simply more cost effective to use your financial resources to build a team with an acceptable median outcome expectancy than to commit to competitive windows, aiming to maximize short terms odds. If you look right now, nineteen teams are currently resting with a projection between 75 and 87 wins. One standard deviation is considered +/- 6 wins. With baseball having freshly entered the new two-Wildcard era, teams aren't spending to be division favorites anymore. The risks outweighs the rewards. Poor teams are aiming to set a median outcome that gives them an opportunity to play themselves into contention, and rich teams are aiming to set a floor that keeps them in wildcard contention. The Los Angeles Dodgers are, if anything, a rich team, and they've already done their part. Investing their wealth into building a strong organizational foundation is a better strategy than using free-agency and market value players as the primary source of talent supplying the Major League roster. The Dodgers are going to be just fine.
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