Giants Econ 101: Sunk Costs are Irrevelant

by The Giants Curmudgeon, 2007-07-17

Okay Giants fans, don’t get scared off by the economics lingo, but today’s lesson is in “sunk costs.” Apparently the Giants do not subscribe to the basic economic theory that sunk costs should be disregarded when making rational decisions. If Giants management would heed this elementary concept of economics, the Giants could be a championship team within a few years.

Here’s Wikipedia’s description of sunk costs: “In economics and in business decision-making, sunk costs are costs that have already been incurred and which cannot be recovered to any significant degree. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action. In microeconomic theory, only variable costs are relevant to a decision. Economics proposes that a rational actor does not let sunk costs influence one's decisions, because doing so would not be assessing a decision exclusively on its own merits.”

As applied to the Giants, this means: move on from bad decisions, rather than continuing to try to make those decisions work just because money was initially invested in the bad decision. The Giants have not followed this approach.

Remember Edgardo Alfonzo? The Giants waited three years to give up on him. Why did the Giants wait so long? Because the Giants had invested a lot of money in him, signing him to a four-year deal. The club was obviously afraid of the criticism that would follow if they dumped him too soon after signing him to a four-year deal.

Armando Benitez is a similar example. He should have been traded as soon it became clear that he was as much of a choker on the Giants as he had been in NY. The only reason he was retained so long was because the Giants had invested in him, and refused to reevaluate that investment.

How about Rich Aurilia? Why is he still on our roster? The Giants signed him when cobbling together veterans in the hopes of a playoff run this year, and now they figure they better try to get their money’s worth, despite the fact that this is no longer a playoff year. Now is the time to cut him loose. Eat his contract if necessary. Add a youngster to the roster in his place.

Dave Roberts? I’m a huge fan of this guy, so it hurts me to say this, but why is he still playing for the Giants? The only reason is that we paid a chunk of money for him. Play Fred Lewis or Nate Schierholtz, and cut Roberts loose. Even if Roberts’ numbers improve this season (which they will), there is no chance that Roberts can contribute to the future of this club.

Some might urge selling off Zito under this sunk cost theory. I’m not one of them. Although we grossly overpaid for this non-ace pitcher (he’s a number 2 pitcher at best), I’m confident that he will be a productive member of the staff for years to come, despite his current numbers.

But the reason to keep him is not because we paid so much for him. It is because of optimism about his future. If the Giants management becomes convinced that he will put up mediocre numbers in the future, they should trade him immediately, regardless of how much of a financial hit the team will take.

I play poker with a guy who, like Giants management, doesn’t seem to get the concept of sunk costs. He always talks about pot odds. But if your cards suck, and you aren’t going to bluff the other players out, it’s time to fold, regardless of how much of your money you already put into the pot that hand. Otherwise, it’s called good money after bad, and that has been the Giants unspoken motto for years.

Here’s my advice to the Giants. Take a fresh look at the roster. Pretend there are no contracts and no money invested in anyone. Focus only on the future of the club, and make decisions without regard to how this season will end up. With these parameters, answer the following: who would you keep, and who would you cut? For starters, I’d cut Aurilia, Klesko, Sweeney and Roberts.

Finally, a note to loyal Curmudgeon readers: yes, we noticed that weeks after the Curmudgeon called for trading Morris and having a fire sale, the Examiner and Chronicle ran similar pieces. Beyond Chron editors tell me that they are used to that kind of “borrowing” by the daily papers.

But Henry Schulman’s piece in the Chron on Friday (“Win or Trade Winds: If this weekend's series with the Dodgers doesn't go well, get ready for a fire sale”), merely confirms the delusional approach that winning one series should keep this team from the fire sale that is so desperately needed. With the Dodgers sweeping the Giants over the weekend, perhaps local columnists and the Giants management will finally see the light.

EDITOR'S NOTE: The Giants Curmudgeon hates soggy garlic fries, corporate stadium names and people who leave in the 8th inning. You can send feedback to letters@beyondchron.org