FanPost

Free agent signings

Not trading RLEC at the trade deadline means he's expiring after this season and giving us quite a bit of capspace going into the offseason.  I'm going to start this post off with some theory about why bidding on somewhat unknown goods (free agents in an open market is a BAD idea, then I'll continue on and explain why it may be a good thing for us.

 

Why signing free agents is bad

The following comes from some economic theory regarding auctions with silent and mostly unknown bidding.  The theoretical example deals with drilling for oil, though it translates well to the free agent market.

The scenario starts with a 100 mile x 100 mile plot of ocean that has some large quantity of oil down in the depths for drilling.  For each individual 10 mile x 10 mile parcel, the governing body that controls the water sets up an auction among oil companies for rights to drill in that parcel. Assume there are a large number of bidders.

Each oil company would place a valuation on every parcel based on how much oil they believe it contains. For each parcel, a range of bids come in, some very low (pessimistic about the contents of the parcel) and some very high (optimistic).  Assume that the average bid (neither pessimistic nor optimistic) is the CORRECT bid, meaning that the information the companies had about the land beforehand was fairly good.

Each company places a bid (based on their valuation) and the highest bid wins the parcel and the right to drill.  Here is where we see the problem.  The AVERAGE bidder is the correct one, meaning their guess was spot-on as to how much benefit they would gain from drilling here.  The problem is, the HIGHEST bidder wins the rights, meaning they overpaid.  For each of the 100 plots, whoever bid the highest amount likely overpaid for what they ended up with.

This dilemma is exacerbated by two factors:

  1. Better information.  The better the information is going into the bidding, the closer the average bid will be to the actual correct bid.  With perfect information, everybody bids the actual correct bid, and the only way to actually win an auction is to bid higher than the correct amount.
  2. A lot of bidders.  The fewer bidders there are, the greater the chance for somebody to sneak in and win a parcel for less than it is actually worth.  On the other hand, if there are a thousand bidders, only the ridiculously exorbitant bid will win.

Now it's pretty clear how this example translates to the NBA.  Parcels of land are free agents and the bidders are the teams.  Possibly the best example of this is Rashard Lewis two years ago.  He apparently had a ton of offers from all over the league, and he chose the highest one, which was almost assuredly too high (even though his "fit" in Orlando was probably higher than it would have been anywhere else).  Now Orlando is stuck paying $16 million to their 3rd or 4th-best player.  This type of open auction is not considered a good way to get value for your money.

 

Why signing free agents might work (only this summer, and only for Portland)

However, in the NBA's case, there are a few places this can fall apart, some of which specifically lean in Portland's favor.

  1. Few bidders.  With so few teams having capspace going into this summer, there will not be much competition for signing players.  This is the underlying assumption to the oil field model, and it really doesn't stand up here.  So few teams will have capspace, and even then, not every team will bid on every free agent.
  2. Bad economy.  Teams will be extremely conservative in their valuations of players this offseason because signing a veteran for 4 years @ $10 million per only to see that guy undergo microfracture surgery could cripple a team, both in terms of the salary cap and simply the money to stay afloat.

The combination of being one of the few teams in the market and having an owner like Paul Allen who is less at risk in this economy than any other owner allows us to bid closer to our actual valuation of a player, not the financially-constrained figure most teams will have to resort to.

 

Summary

Open auctions like this are generally not a good way to get bang for your buck.  Luckily, we're in the position where we don't really care about our buck.

This offseason could give us a good opportunity to upgrade at a postion of need, provided the right guys enter the free agent market.

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