A formal discussion on differing dynasty values for different team situations.
This is the second iteration in the series(?) of articles where Mason (@DFF_Kiwi) marries together our favorite hobby with the theories and methods of finance and economics. I promise it isn’t as boring as it sounds! The first article on Rookie Picks and Opportunity Costs can be found here.
In a world run largely by markets, the mere mention of a “discount” is usually enough to attract the attention of all but the most affluent members of society. Whether it be a 2-for-1 deal on chocolate or a few hundred dollars off a new TV, getting a discount inspires the same instinctual response. It’s that feeling of winning, of getting one-up on the vendor, of somehow besting the market which keeps us on the constant lookout for such deals.
In dynasty fantasy football, discounts rarely appear in such obvious forms. As with any market supported by an information dissemination machine as efficient as Twitter, mispriced players do not remain so for any exploitable period of time. So what use is there even talking about discounts when finding one in dynasty fantasy football is a seemingly hardwired impossibility?
The answer lies at the core of economic and financial theory and refers to discount-ing as opposed to a simple discount. Discounting in the financial world is used to measure two things. The first of these is the time value of money, which states that a dollar today is worth more than a dollar tomorrow. The basic reasons behind this are inflation and the ability to invest a dollar earned today and earn interest on it.
In a dynasty environment, this is fairly easy to understand in terms of a veteran player versus a future rookie pick. The player is the “dollar today” in this scenario, and the interest can be considered his immediate production. Of course, things aren’t quite so simple when making actual decisions on trades. Factors such as age and surrounding talent changes come into play, but kicking production down the road is an important consideration for any team. This is especially so when coupled with the second of discounting’s elements.
That second aspect is the uncertainty attached to future cash flows. This uncertainty may arise due to the risk of a project running late or the possibility of unforeseen costs arising, both which would reduce the overall profitability of an investment.
In dynasty fantasy football, the easiest way to think about this is in relation to future picks. Say you’ve received a trade offer including another team’s 2019 1st round rookie pick. You take a quick look at their team and estimate that they are a middling team, even with the player they are trying to attain from you. Most dynasty players would value such a pick as roughly the 1.07 a year from now, a “2019 mid 1st” as is the phrase used in many a Twitter trade poll. By applying the principles of discounting to this situation, two things can be achieved:
- The probabilities surrounding the pick’s actual draft position a year from now can be properly defined and understood.
- A relative value that should be placed on that estimated pick given a dynasty team’s present position (competing vs building) can be attained.
Both of these points are worth diving into further, but before we get into that there is one tiny bit of technical admin we need to cover off first: the discount rate itself!
Measuring Certainty & Containing One’s Hubris
The discount rate is the tool utilized by economists and financial analysts alike to account for the aforementioned time value of money and uncertainty factors of future cash flows. It is a widely utilized tool in public policy and investment decision making, and at least in my case, in my dynasty trade negotiations.
The discount rate is expressed as a humble percentage. Those utilized in the business world are calculated based upon factors such as market and risk-free rates of return, but to the relief of most I won’t be recounting those today, I did enough of that at college! (you can find a very basic breakdown of the NZ Treasury’s discount rate here if the inputs are of interest).
For our own purposes, one can simply place their own values upon current vs future production (or value if you are that way inclined) and certainty vs uncertainty. As was the focus of the first DFF101 piece, my focus here is not to tell you how to value players, but instead to help dynasty players look at value and risk in a more structured and efficient way.
Discount Rates in Effect – Applying Different Rates to Different Situations
To best illustrate the potential utility of discount rates for dynasty owners, we are going to look at a choice of two players for a rebuilding team and a competing team. A suggested discount rate will then be shown in a practical trade example for each. For simplicity, I have valued age as being worth 200 when a player is 20 and 0 when they are 30.
The formula for finding discounted values (present values) is below:
- nominal value = predicted points over n years
- disc rate = chosen discount rate
- n = number of years in future
A rebuilding team is typically a minimum of two years from championship contention, and as a result will value factors like youth and value highly, no matter the positional allocation. As such, the value of future production will be almost equal if not greater than the value of present production for a rebuilding team. I would suggest no more than a 5-10% discount be placed upon future value for such a team. The uncertainty part of the discount rate calculation is also very low for a rebuilding team, as while they don’t want to lose in perpetuity, a botched draft pick or trade is of much less damage to them than to a competitor, allowing them to swing for the fences on high-upside players and picks with relatively less downside. I would again suggest that no more than a 10% discount be placed upon uncertainty in this instance, but this is contingent on the severity of the rebuild.
Suggested Rebuild Discount Rate = 5% – 20%
Example: Doug Baldwin vs Corey Davis, estimated rebuild length of 2 years, 10% disc rate
Any serious competitor is gunning for the championship and the championship only. Whilst they will be mindful of not gutting their roster of all youth and potential reloading pieces, the effect of immediate production on their chances of winning will vastly outweigh considerations of medium-long term production or value in all but the most extreme of cases. Valuation for non-immediate production would not be zero but has been treated as such here to illustrate the effect of discounting. I would suggest roughly a 50% discount be given to future production for competitors. Uncertainty, unlike the rebuilding team, is not a competitive team’s friend lest it be a Best Ball league. Predictability in the scoring column each week is what competitor’s covert, and as such will chase mid-aged vets over projected breakouts or rookies. I would suggest a 50% discount also be used for the uncertainty side of the discount rate calculation here.
Suggested Competitor Discount Rate = 40% – 60%
Example: Antonio Brown vs Corey Davis, competitor focus of 1 year, 50% disc rate
Back to the Huddle
So after all those formulas and numbers, what do I actually expect one to take away from this? As with the prior look into opportunity cost, this foray into discount rates was not meant to provide a black and white way in which to conduct player valuation. The aim was to get dynasty players thinking about how they choose to value different players and why they value them in such a way, whilst also providing an intuitive and theoretically sound way of thinking to arrive at such valuations with some sort of consistency. Whether this helps owners identify their hidden biases for or against certain players or player types, or helps to make them more consistent in player valuations during trade negotiations, both the individual and the community as a whole can benefit from taking on board the less controversial practices of the financial realm.