Monday, November 12, 2018
Prospect Valuation
?Terrific stuff from Craig at Fangraphs. Loved the whole idea and execution. This is what sabermetrics is about.
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One of the interesting points was the present value of future WAR (not to be confused with the present value of future dollars). Craig applies an 8% annual discount rate which seems high to me. The question to ask yourself is this: if you had a 4 WAR player today, what would you need in future WAR (say 3 years from today) in order to give him up? Clearly, it has to be more than 4. Is it 4.1? 4.5? 5? 6? Prima facie, I'd say 6 is far too high. 5 seems too high as well and obviously 4 is too low. The answer should be close to 4.5? If you think of it in terms of future WAR 1 year down the road, maybe it would be 4.1 or 4.2? And two years down the road it would be 4.3 maybe 4.4?
So, what kind of discount rate would that imply? A 4% discount rate would suggest that you would trade a 4 WAR player for this kind of WAR player, if you wait these number of years:
- 1: 4.17
- 2: 4.34
- 3: 4.52
- 4: 4.71
- 5: 4.91
If you tried different numbers, you will find that 2% seems low and 7% seems high. So, what is the marketplace answer? I don't know. It would be easier in other sports because they trade draft picks. You can try to look for it in MLB by looking for veterans-for-prospects trades, but there's going to be other considerations there that may prevent us from getting at a good number.
Anyway, great stuff all-around.
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