Friday, July 17, 2009

The Boston Red Sox, Sunk Costs, and Julio Lugo

The Boston Red Sox face an interesting decision in the next few days. One of their shortstops, Jed Lowrie, returns from injury this weekend. They will have to make a spot on the roster for him. One logical move would be to release Julio Lugo, a shortstop who has performed poorly, particularly defensively, during his tenure in Boston. However, Lugo's contract runs through the end of next season. Thus, regardless of whether Lugo plays another game on the Red Sox or not, the club will owe him approximately $13 million for the remainder of his contract.

What should the Red Sox do? The $13 million represents a sunk cost. It should be irrelevant to the decision as to whether Lugo should remain on the team. It's as if they already paid him the money, since its a guaranteed contract. If Lowrie is better than Lugo, then the club should release Lugo and "eat the money" as they say in baseball. Of course, most sports teams would keep the player, out of a desire to not "waste" the money that they have spent on him. That's poor logic, but it happens all the time in sports. The big-money athlete gets playing time, while a low-paid athlete sits on the bench, despite the fact that the low-paid athlete is the better performer. Why? Because management allows the sunk costs to sway their decision.

Scholars Staw and Hoang published a great paper in Administrative Science Quarterly back in 1995 showing that sunk costs distort decisions in the NBA. Players drafted very high coming out of college tend to get more playing time and stay on their original team longer than players selected later in the draft, holding constant for performance. In short NBA clubs often throw good playing time after bad, much like companies throw good money after bad when high sunk costs exist.

What will the Red Sox do? History suggests that this management team understands the sunk cost trap, and it is willing to release players even if they have invested a great deal of money in the player. They faced the same situation with another shortstop, Edgar Renteria, and they chose to "eat the money" rather than throwing good playing time after bad. My guess is that they do the same with Lugo. Of course, some fans might wonder why J.D. Drew continues to get so much playing time, and if perhaps his huge contract has affected the club's decision-making with regard to that player, who has under-performed expectations since signing with the Sox. Could J.D. Drew someday be another test of Boston's ability to avoid the sunk cost trap?

2 comments:

Real Fake Sports said...

The Red Sox can afford to release guys like this and cut their losses.

Real Fake Sports

Michael Roberto said...

The point is that all teams can afford to do this regardless of how much revenue they generate... the costs are sunk! In fact, everyone certainly can afford to do this if the example parallels this one, in which the player replacing Lugo is a very inexpensive ballplayer fairly new to the major leagues.