UPDATE: Edwin put this better in one paragraph than I could in many paragraphs so here's his comment on why we typically overvalue our own players and undervalue others.
I think fans have a poor grasp of the market. They over estimate demand(especially for player’s they like or want to see traded), and under estimate supply. They also don’t look at all of the market factors such as contracts, remaining value over the season, control over future years, and the long term/short term value of prospects. Most fans are content to use simple logic of “we don’t need this player, Team X needs a player like our player, we get big big prospect.”
I don't believe I've written a post here on Obstructed View explaining the trade value that you see discussed this time of year. The first thing to remember is that it's impossible to figure out how much one team may actually be willing to offer for a player. What we can figure out is how much that player is worth and using previous research we can estimate the value that player is likely to receive in return. The key word there is estimate.
What we first have to do is establish the talent level of the player being traded. For the purposes of this, I'm going to use a fictional player whose talent level is 2 WAR. This player is fictional because we know for certain that he's a 2 WAR player. Give him 700 plate appearances and he will be worth exactly 2 WAR. Guaranteed. That's ridiculous so it's fictional, but it's good enough to use for an example.
This player is in the middle of a season and has one year remaining on his contract and he's also not even going to get a year older the next season. Our fictional baseball player is league average and remains the same age for two seasons in a row. The win value in the current season is $5 million and it increases to $5.5 million the following year. We can see from this that we know for certain that at the midpoint in the season he'll be worth 1 more WAR that season and 2 more the next. He'll provide a total of 3 WAR over the remaining contract. 100% guaranteed. A little math and we find that he's worth $5 million the remaining part of this season and $11 million next for a total of $16.5 million.
Our player is paid $5 million this year meaning there's $2.5 million additional to be paid. He's also paid $5 million the following season. He's worth $16.5 million and has been paid $7.5 million over that season and a half. He's not good enough to then be offered the guaranteed minimum contract required to get draft pick compensation so his surplus trade value is simply his value ($16.5 million) minus his salary ($7.5 million).
Despite the certainty of our player being worth 3 WAR the remainder of his contract, it's entirely possible that some team out there is willing to overpay for whatever reason. That 3 WAR could be worth more to their team than another. They may just like the color of his hair. I don't know. There's any number of reasons why a team may decide they just need to have him. I don't know and neither does anybody else. We could discuss these possibilities if we wanted. We'd go nowhere in our discussion because none of us knows whether or not the Twins like light brown haired players or feel they just need to have that 3 WAR on their team.
We could discuss the supply and demand. It might have an affect on the value, but we don't know because we don't really know what the supply and demand is. We might have an opinion, but we don't know. As a result, it makes no sense to include it. It could have no impact whatsoever. It could make a huge difference.
Supply and demand works both ways too. When it comes to valuing players at trades I often hear it, but it's always in the sense that the player is worth more because of it. That's just not true. How many teams are really wanting another 1 WAR this season (that's about what you'd get from Ryan Dempster and Matt Garza)? The answer to this question is not as many as you might think.
How acurate have these estimates been? That's really the question. If they aren't accurate, what's the poing in publishing them? This past January I provided two examples for the biggest trades this past offseason.
Matt Latos: 13.5 WAR over next 4 years
Average win value: $5.39 million
Value provided: $72.53 million
Projected Salary based on arbitration 1, 2 and 3 being worth 40%, 60% and 80% of market value: $33.3 million
Projected Salary based on similar players: $26.0 million
Difference between value and projected salary (similar players): $46.55 million
Boxberger: $2 million (early in his career, but he has some minimal value)
Grandal: $10 million (probably not a top 50, but a good prospect nonetheless)
Alonso: $15 million (based on his prospect ranking at the beginning of 2011 by Baseball America)
Volquez: $15 million (projected for 3.5ish WAR over next 2 years, $5.13 per win average, $18 million value, estimated $8 million salary, $10 million surplus)
Total: $52 million
You can click on that link to read the details of the Mat Latos trade. The end result is that these two huge trades saw a surplus trade value of $86.6 million traded for $82.3 million in value.
Each of the three trades I've mentioned here were huge trades. Just as players who sign 1-year contracts aren't paid $5 million per win, we cannot possibly expect these numbers to work the same for all trades. Players who sign 1-year deals are often paid only $3 million per win or so. These numbers are just the surplus value above what he's likely to provide. That's it.
I don't pretend that these numbers are always going to be accurate. It's silly to think that because so and so has this much value that every team will only offer this much value. I don't think that at all. Look at them like you would an over/under. A team favored by 7 may win by 21. They might lose by 14.
But comments like the one below are bullshit:
I fully think these projections are stupid because they dont deal with supply and demand. If there was a projection system that could deal with service time vs. other pitchers on the block it would be better. But teams in contention will always pay a premium on top not pitching if they think it can get them over the hump.
Where is the research to show that teams in contention overpay? It may well be true, but saying it as if it is does not make it so.
People have said this regarding the free agent market and they're wrong. The New York Yankees do not spend more per win on the free agent market than the Kansas City Royals do. What happens is that when the Royals stop spending because it no longer makes sense to buy additional wins (additional win doesn't result in the same increased revenue) the Yankees keep buying wins because they are still earning more revenue with each additional win. The Royals, A's and Pirates stop buying wins and the large markets keep buying them. For the same cost as they were when the Royals were buying them.
I don't really have any idea what factors are involved in teams deciding how much to give up for a certain player. I'm not convinced we should treat this differently than we do free agents. If someone wants to show that contending teams regularly overpay in trades I'd love to see the research. Until I see it, I'm going to assume they do not. I don't know how supply and demand affects the negotiations or if it affects them at all. If someone does I'd love to incorporate it into the articles.
My guess is that it doesn't affect it much. If I had to put money on this I'd say the one thing that most affects the value teams receive in return is this: stupidity. Some executives do get desparate and may give up more than they should. That's believable because people are stupid. I don't believe it's going to turn a commodity like Matt Garza into twice his real value. I suppose it's possible, but I think there's a limit for stupidity. At some point even the stupid have to put their foot down and say, "that's stupid."
But I don't know. I don't talk about those factors in these articles because I don't know and have no way of knowing.