Behaving Economically?

I've been reading a lot of books on behavioural economics and decision making lately. Can't say I'm any smarter as a result, fact is I'm often rather confused when any math symbols pop up, but there certainly have been numerous studies, anecdotes and learnings that will come in useful as idle chatter at my next cocktail party*.

As I'm sure many of you do, when I'm reading a book on game theory, artificial intelligence, foreign policy or behavioural economics I like to ask myself: what could this mean for the Toronto Maple Leafs?

Ok, maybe that's just me...I'm not sure if my Leaf filter is a genuine problem or if it's a heuristic that helps my aging brain better understand the subject matter at hand. I'd like to think it's the latter...

Out of the reading I've been doing lately, a few items have stayed with me and do seem to have some sort of application to the world of sport:

1. Herbert Simon's early work on problem solving and production systems;
2. Anchoring, especially as it applies to pricing;
3. Discounting (Hyperbolic v. Exponential); and
4. Favourite longshot bias.

Decision Making and Player Development

I've been a big proponent of the Leafs keeping their youngsters in developmental leagues for as long as possible. Not only does it give the players the opportunity to play big minutes in every situation (PP, PK, ES, etc.), it can also extend waiver eligibility, often doesn't exhaust a year of the player's entry-level contract, and if the player is in the CHL, their contract doesn't count against the 50 player limit.

In the late 1950s, Herbert A. Simon was exploring "solution by recognition" and the following passage made me question the best way to condition a young athlete, like say a Nazem Kadri...

One can train a man so that he has at his disposal a list or repertoire of the possible actions that could be taken under the circumstances...A person who is new at the game does not have immediately at his disposal a set of possible actions to consider, but has to construct them on the spot - a time- consuming and difficult mental task.

The decision maker of experience has at his disposal a checklist of things to watch out for before finally accepting a decision. A large part of the difference between the experienced decision maker and the novice in these situations is not any particular intangible like “judgment” or “intuition.” If one could open the lid, so to speak, and see what was in the head of the experienced decision-maker, one would find that he had at his disposal repertoires of possible actions; that he had checklists of things to think about before he acted; and that he had mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decisions arose.

Most of what we do is to get people ready to act in situations of encounter consists of drilling in these lists into them sufficiently deeply so that they will be evoked quickly at the time of the decision.”

I think your typical sports talking-head would refer to the experienced decision-maker as a "wily vet"and the challenges of the novice as "rookie errors." But what it comes down to, is ensuring players have a thoroughly developed and refined repetoire of possible actions.

Of course, the big question remains: is this accrual of experience and list-building best done at the AHL or NHL level?

Anchoring

Anchoring refers to the core information an individual refers to when making an initial decision. Individuals often have a habit of over-relying on a single trait or a single piece of information in their decision making process. This is especially true when it comes to our understanding of value pricing, for example:

People tend to have an "anchor" price for most products, and judge them in relation to that anchor. For example, if you expect a laptop computer to be about $1,000, the $750 model might look like a bargain, but if you were anchored on $500, it'll seem expensive. Some products have very stable anchor prices (milk, bread), others change often (most electronics).

Dan Ariely has some great writing on how established prices set an initial value that consumers are usually unwilling to move from.

For years, sports teams in weaker markets, especially those with attendance problems, have given away tickets. While that tactic may generate revenues through increased concession sales, parking, souvenirs, etc. it may create a larger challenge: it effectively establishes the value of a game ticket as $0.

If you're a Panthers fan and can get free tickets by showing your Florida State drivers license, the Panthers have effectively established the value of their tickets as $0. How many people would be willing to pay the face value to attend the next game?

I think the anchoring is one of several challenges facing the Toronto Blue Jays.

For years, Toronto was awash in free Jays tickets through sponsors, potential sponsors, vendors, give-aways, etc. As a result:

1. All of these comped tickets were included in the attendance counts, inflating the Jays' attendance numbers; and
2. For many baseball-going Torontonians, it established the value of a Blue Jays ticket as $0.

I'm a walking case study in anchor pricing: I've rarely paid to go to a Jays game, getting my fill of free tickets each year, and the last time I took my family to a ball game, it cost me $28 for four tickets at Safeco.

I've clearly established my anchor price for major league baseball and it's going to be tough, if not impossible, to get me to pay $22 for an awful bleacher seat at the Dome, never mind shelling out $44 for field level seats.

Looking at the dismal attendance numbers, I get the feeling I'm not alone.

Discounting

The two types of discounting that are particularly interesting to me are hyperbolic versus exponential discounts.

Not to beat the Phil Kessel trade to death, but I think it's a good fit here. In discounting, there is a tendency to prefer immediate payoffs to those that may take time to realize - immediate needs outweigh anything distant or abstract. Or as Greg Muller so nicely puts it:

The core question is how people penalize various options for having a ‘delayed payoff’. Would you rather have $30 now and $50 in five years? Implicit in the decision-making process is that later payoffs aren’t worth as much. You might need the money now more than later, or there’s a risk you won’t get the money later, due to death/bankrupcty of the source/etc. The drop in value of a payoff due to the delay involved is called the ‘delay discount’....[people] tend to over-prefer options with more immediate payouts, which should be no surprise to anyone who has interacted with humans before.

I have no idea if any of this entered into the decision making process behind the Kessel trade, but considering the Leafs have traded away 50% of their first round picks in the last decade, I have to think there's some sort of discounting going on as the team prefers to address immediate needs at the cost of a supposedly uncertain future.

The Favourite Longshot Bias

I'm not much of a gambler. For my NCAA bracket this year when I came across matches that were simply too close for me to call I turned to Vegas sports books and chose the team with the better odds. I finished in the top third of the pool (well back of the money) but, more importantly, I once again lost to my NCAA basketball loving wife.

I had presumed that by turning to an informed audience, that is people who bet on sports, I might have a better chance at winning or at least getting an informed opinion.

But then I started reading about the favourite longshot bias, the tendency for gamblers to over-bet on longshots and under-bet on favourites (this approach would have been rather fruitful in the first few rounds of the NHL playoffs, especially in the East).

One of the reasons suggested for over-betting on longshots is that gamblers are enamored with risk.

Once again, putting on the Leaf filter, I think the favourite longshot bias partially explains why GMs acquire players in decline. Case in point: was there a longer-shot at recovery than Andrew Raycroft? The phrase "longshot" doesn't go far enough to define the odds of him ever returning to Calder Trophy winning form, yet three GMs have employed him in his post-Boston decline (two of whom are no longer GMs).

In terms of risk, his decline in price (and term) certainly helps explain why Mike Gillis would ink Raycroft to a deal.

So called "risk-love" (the opposite of risk-aversion) is often associated as the cause of over-betting on longshots and certainly explains Raycroft's UFA contract in Colorado.

Unfortunately, neither value nor risk-love explain JFJ's terrible deal to acquire Raycroft.

Which leads me to the other rationale often cited to explain the longshot bias: bettors misunderstand, or simply cannot understand, probabilities.

I think JFJ is firmly in the latter camp, possibly because he was a rookie GM unfamiliar with "solution by recognition" and he miscalculated the discount by preferring the immediate solution of an NHL starting goalie in 2006 to the longer-term payoff of developing Rask into a better starting goalie in 2009...

As for my reading habits, I'm reading George Orwell's Essays and am in the midst of a brilliant piece on Charles Dickens, but for the life of me I'm struggling to figure out what it has to do with the Leafs....

*more likely to get me really weird looks at the grade school doors as I wait to drop-off/pick-up my kids.

What's the going rate for Kulemin?

Nikolai Kulemin is a Restricted Free Agent (RFA) whose contract is up for renewal. There has been a great deal of speculation as to what it might take, in terms of dollar and term, to get Kulemin back on the Leafs.

Last season, Kulemin carried a cap hit of $1.48M with a salary of $850,000. Under the CBA, he automatically qualifies for a 10% raise, meaning the minimum salary he can earn is $935,000. He will of course, sign for a more substantial raise that reflects his potential and his relative importance to the team.

Now, I have to say that I have no idea what Nikolai Kulemin is worth. I mean, I’m writing this while drinking beer on a Monday afternoon – so consider the source - but I thought I’d take a stab at a few of the variables involved in his upcoming contract negotiations.

1. What contracts (cap hit and term) have other RFAs with similar stats to Kulemin signed; and
2. What are his arbitration rights? Can Kulemin (or the Leafs) go to a third party to set Kulemin’s salary?

Comparables

In order to get an idea of the compensation Kulemin might be in line for, I wanted to find players that have put up similar numbers.

I limited the field to players that were RFAs at the end of the 2008-09 season. By looking at players that put up totals that are in the same range as Kulemin, we can look at the resulting contracts that they signed to get a sense of the going rate for 30 to 40 point RFA.

In terms of production, Kulemin’s two years in the NHL have been pretty similar:

73GP 15G 16A 31Pts
78GP 16G 20A 36Pts

There aren’t many comparable RFAs from the 2008-09 season, but here are five RFA forwards with numbers that are somewhat similar to Kulemin’s most recent year. Here are their boxcars and the deals they signed back in 2009:

Brandon Dubinksy 82GP 13G 28A 41PTS 2 years, $1.85M/year
Ryan Callahan 81GP 22G 18A 40PTS 2 years, $2.3M/year
Chad LaRose 81GP 19G 12A 31PTS 2 years, $1.7M/year
Kyle Brodziak 79GP 11G 16A 27PTS 3 years, $1.15M/year
Kyle Wellwood 74GP 18G 9A 27PTS 1 year, $1.2M/year

Based on these numbers, I would think Kulemin is looking at a payday of $1.75M to $2.3 million per year. I’d guess – and this is nothing more than idle speculation – Kulemin inks a two to three year deal with a $2.1M annual cap hit.

That guess, and these numbers, don't take into consideration arbitration...

Arbitration Rights

By my reading of the CBA, Kulemin is eligible for arbitration. But of course, nothing with the CBA is that straightforward.

Arbitration eligibility is based on the age that a player signs his first SPC and his years of professional service. Kulemin signed his entry level deal in May 2007, when he was 20, but by the terms of the CBA he’s considered 21 years old:

As used in this Article, "age," including "First SPC Signing Age," means a Player's age on September 15 of the calendar year in which he first signs an SPC regardless of his actual age on the date he signs such SPC.

According to 12.1 (a) of the CBA, players who sign their SPC at 21 must have three (3) years of professional service to be arbitration eligible.

Kulemin has two seasons with the Leafs and one year with the KHL’s Metallurg Magnitogorsk (a team name that I want to load up with umlauts and claim is an ‘80s metal band). I have no idea if that season in the KHL counts as a year of “professional service” as there’s no definition of “professional service” in the CBA. Helpful, huh?

The CBA does define a “professional games” as:

any NHL Games played, all minor league regular season and playoff games and any other professional games played, including but not limited to, games played in any European league or any other league outside North America, by a Player pursuant to his SPC.

So if Kulemin’s time in the KHL counts as profeesional games, I’m going to presume that a year of professional games is a year of professional service. That means Kulemin has played three professional seasons, which means he's eligible to take the Leafs to arbitration. That means the Leafs don't hold all of the leverage in these negotiations and, in addition to the so-called threat of bolting to the KHL, Kulemin and his agent can also seek higher compensation by taking their case to a third party.

We should know by the first week of July where exactly Kulemin and the Leafs stand...

Maple Leaf Gardens

About 10 days ago, I was very fortunate and got to accompany Globe and Mail photographer Fred Lum inside Maple Leaf Gardens.

Fred's photos are now up at the Globe and Mail and they're worth a look.





















The stairs going up to Harold Ballard's former bunker in the North end of MLG. The new steel beam work can be seen in the upper left corner of the shot.