A Smart Move by Lohse and Boras

Kyle Lohse has agreed to a four-year, $41 million contract with the St. Louis Cardinals. It wasn’t that long ago when Lohse was looking for work. He supposedly turned down a three-year $20 million offer during the previous off-season, before finally settling on a one-year $4.25 million (incentives pushed this number up a bit) deal with the Cardinals. At the time, many pundits loudly criticized (with laughter) Lohse’s agent Scott Boras for expecting a multi-year deal with an annual value of $10 million. The initial signing by the Cardinals was supposedly proof of Boras’s hubris.

Well, it turns out that Boras was right. If Lohse had signed the deal three-year $20 million deal, he would have missed out on this deal. I have Lohse valued at $47 million over the next four seasons, and I’m sure Boras was well aware of his client’s value. The opportunity cost of signing a bad deal now is not signing a better one later; it’s a good lesson to remember.

10 Responses “A Smart Move by Lohse and Boras”

  1. Kevin says:

    JC,

    I am struggling a little with your logic.   Lohse is worth $47 MM now because he pitched better in 2008, better than expected (somewhere between 75 and 90 pecota percentile).  The question is what was it reasonable for Lohse to be worth before 2008 over the next four years.   That could have been around $25 MM.

    Lohse’s higher value is due a good season.  Are you saying Boras knew Lohse was going to have a better year and so he didn’t sign the three year deal?

    Lohse is a LAIM pitcher who pitched a little better than normal and who’s number look better because of the lower offensive environement.  Boras sold that, but he also got “lucky” with Lohse’s peak year.

  2. Ken Houghton says:

    It’s a good deal for Lohse, but is it a good deal for the Cardinals?  Beyond the Box Score seems to think not.

    http://www.beyondtheboxscore.com/2008/9/30/624872/the-first-silly-contract-o

  3. Millsy says:

    I think the Cardinals panicked here.  We’re talking about a 30 year old pitcher here…34 in 4 years.  This season was a huge anomoly from the rest of his career.  Although Boras got lucky and did the right thing, I respectfully disagree Lohse is worth anywhere near $47 million.  The only upside to Lohse in comparison to guys like Carpenter and Mulder is he’s been able to stay healthy.  But when I healthy guy is in there with a career ERA close to  5 and WHIP above 1.40.  Lohse gets hit hard by right handed batters and doesn’t strike out many.  He seems to tire when he hits the 3rd inning (he has strong 5th innings, but I’m not sure why).    No doubt he had a great pre-all star break, but his numbers come back to earth post-all star.  I haven’t done any sort of empirical analysis but I’m confused as to how his first half of the season can be given so much weight here when many young players that aren’t yet arbitration eligible can post a season similar to Lohse’s career numbers.

  4. JC says:

    My estimate is not based on this year, but the average performance from 2004-2007.  I should have mentioned this in the post.  His 2008 performance wasn’t that much better than his previous performance.

    Baseball players are valuable assets that are growing in value. Kyle Lohse isn’t worth $10 million/year because is so much better than other players. He’s worth that much because players of his caliber generate that much revenue in helping a team win.

    Though arbitration eligible players (and fully reserved players) make lower salaries than free agents, they cost more then their salaries to acquire. For the Cardinals to acquire an arbitration-eligible pitcher in line for $3 million, but is posting Lohse-like numbers, the Cardinals would have to compensate the trading team for the lost value.

  5. Simon says:

    “The opportunity cost of signing a bad deal now is not signing a better one later”

    That might be a hard sell to Andruw Jones.

  6. Jason S. says:

    I think it might be better to say that Lohse and Boras got lucky rather than this being some stroke of genius foresight.  If Lohse’s ERA jumps up a full point next year, which is quite probable, let’s see if the Cards still think this is such a great deal.

  7. Simon says:

    What surprises me is this:

    JC is clearly right, Boras presumably does calulations just like this when negotiating contracts for his players.

    When he is selling this tactic to players though one assumes he runs through he numbers with them, and says something like…. “you can’t take this offer Kyle, its an insult. Take this one year deal go out and have a good year and I’ll get you what you’re worth next year.”

    Most players seem to accept this line of arguing. But they could get injured: if Kyle Lohse had got hurt this year and was having rehabbing from Tommy John surgery right now, to return in mid June next year what kind of contract would he be offered?

    I would suggest that if I was Kyle Lohse I would have to think long and hard about that before turning down £20m over 3 years, and taking just $4m for this year.

    Boras on the other hand has many players in this position each year. He can afford to take the chance, he’s unlikely to lose his chunk of the deal on all his players. Over Scott Boras’ career the projections and the financial forcasting are likely to play out; presuming he’s got good people doing them for him. He will make more money for himself and his client pool overall.

    If I were a player I’d be concerned about being the 1 in 10 (I made that number up out of thin air) player for whom the tactic didn’t work.

  8. Marc Schneider says:

    The players aren’t complete idiots.  I’m sure they know Boras’ track record when they sign up.  Any horror stories will make their way through the grapevine.  The fact that players still sign up with Boras suggests that they think his approach works.  Yes, there is risk in his approach with regard to Lohse, but it’s not like he was going on welfare if it didn’t work.  Basically, it was a calculated gamble; I’m sure Lohse knew the risks.  I know that ballplayers aren’t great intellectuals, but I don’t buy the idea that Boras manipulates them into signing bad or risky deals just for his benefit.

  9. Simon says:

    Sorry, I wasn’t criticising Boras, or suggesting he was manipulating the players. I wonder if he takes a reduced cut on the down year and an increased cut in the up year? He should do really to balance out the risk/rewards shouldn’t he?

    I’m just saying I don’t think the risk sits evenly. You would expect the price the player pays Boras to change proportionally to the risk, I wonder if it does? Do we know?

    I should point out I have a little economic knowledge which is obviously a very dangerous thing. But isn’t the pricing of risk a fairly hot topic at the moment? Dpes anyone have any idea how good a job baseball players do of pricing it?

  10. JC says:

    Simon,

    You raise an interesting point that I have too wondered about. It would make sense if Boras insured his clients a minimum salary (he has many clients, so he could easily pool the risk) to get them to wait for the big payday.