Tuesday, December 24, 2013
Fallacy of the albatross contract
?There's very little that bothers me more than reading something like this:
but it's also likely that this is a bad contract by the end of the deal
Do I really have to do this every two months? These two contracts both have the same present-day value.
20 28.5
20 25.5
20 22.5
20 19.5
20 16.5
20 13.5
20 10.5
The first contract gives you savings in the early years, savings that are DEFERRED to the later years. If you have to trade a player with two years to go, you'd have to throw in the deferred savings in any contract deal. In the above case, you'd have to throw in the 16MM$. It's not an albatross and it's not a bad contract.
The reason that it LOOKS like a bad contract is that you think you are paying the full price in the early years, when in fact, you are paying a DISCOUNT. The lack of appreciating that you are actually getting a discount in the early years is the reason this fallacy persists. Even Robinson Cano is getting paid a discount in the early years. Had he signed a one year deal, he'd have gotten 30+ MM$. Since he'll be getting 24MM$ per year, the deferred savings is going to get paid out in year 10.
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