03/18/2010 05:12 am ET | Updated May 25, 2011

Hot Stove Myths

Let me debunk a few common myths about baseball's labor market as baseball's second season begins.

GMs can buy low and sell high -- So, let me get this straight: you think you know when a player is playing above or below his true ability--usually due to a small sample or by using a SGT-approved metric instead of a mainstream statistic--but guys who make a living in baseball completely miss it. For this to work, the GM on the other team has to be a colossal moron. GMs have made mistakes in the past and will make mistakes again, but they're not dumb enough to act on a meaningless hot/cold streak. You can't sell high or buy low and profit financially because all GMs understand these things. You don't have to wait for a guy to get hot to sell him, nor dump him before he gets cold. In addition, the key knowledge of when the peak or trough is doesn't exist, except in the mind of message board posters. Fluctuations in performance create uncertainty, which affect the price that GMs are willing to pay.

The number of free agents at a position affects the price of free agents at a position
-- It seems logical that more free agents at a position will mean more options for teams. Players act as substitutes and thus a team can pit the players against one another to keep salaries down. The problem with this is that the free agents have come from somewhere. A high number of players looking for new teams means that there is a corresponding number of openings that teams need to fill. For example, it there are four good shortstops on the market this means that there are also four openings on team. The increased supply of players is canceled out by the increased demand by teams needing replacements.

Every trade has a winner and a loser
-- Swapping resources only takes place if both parties are made better off. Therefore, when we observe trades taking place, it's likely that both parties are doing so because they expect to improve their teams (see the weak axiom of revealed preference, or as I call it: "the useful WARP"). Mistakes happen, but as a general rule, all parties to trades are winners. Who says economists aren't touchy-feely?

Players peak at 27 and old players are worthless -- Players peak at 29 -- 30. And just because a guy is past his peak doesn't mean he's not valuable. The aging process is gradual, more like the Minneapolis Metrodome than an Egyptian pyramid. If a guy was good last year, even if he's in his mid-30s, he'll probably be good next year. Now, the older he gets the more dangerous long-run contracts get, but one- and two-year deals are fine.