As Keith Law broke the story last night, the Seattle Mariners have reached an agreement with Felix Hernandez for an extension. Rumors have the contract in the $80 million range for the next five years. If this is true, then I think the Mariners overpaid.
Felix Hernandez is a good pitcher, and his 2009 was excellent. Based on last year’s performance alone (as I used for Josh Johnson), I have him worth about $89 million over the next five years. However, he’s still got two more years of arbitration where he’d likely get less than his worth. The M’s don’t appear to be getting much of a discount for signing him early. And, while his previous performances were good, I suspect that he’s not quite as good as his 2009, which whittles away some of his expected worth. But, it’s the Mariners’ risk to take, and they may feel that he’s every bit as good as his 2009.
But, I think this also gets to the heart of something I’m doing with my estimation of player’s worth. I’m not using a hedonic pricing model—estimating value from market prices. For example, when you buy a house, your lender will use a hedonic model to estimate the value of your home. Using characteristics such square footage, amenities, school zone, etc. the model spits out a projected worth of your new home based on the market prices for other homes in the area. As we’ve recently learned, when these models go bad, we get a bubble, and the pop can be dramatic. If I was to use a hedonic model, I think the Hernandez contract would look better.
Instead of using market prices, my model uses a fundamental value approach, which relies on revenue data to estimate how performance is associated with revenue generation for clubs. What teams are paying for certain player qualities never enters my model. Such models have the weakness of having to rely on financial information that isn’t known with a high degree of certainty, but fundamental value estimates have the advantage of being able to spot bargains and bubbles in market prices. Right now, I believe that teams are paying too much for pitching. It’s not by a huge amount, but enough to cause me to keep on eye out for a crash.
Hernandez is a good pitcher who is valuable, but I think the M’s would have been wise to hold out for a better deal. Buying out a player before he becomes a free agent should be done to receive a discount on a future contract, and I don’t think the Mariners got big enough discount to commit to this deal.