If you want to learn about how the world works in bite-sized essays, my best recommendation is to track down the work of James Surowiecki in The New Yorker. He's been doing it for years, and brilliantly. I would guess that most of his 1,000-word essays can be somehow related to baseball, but his recent look at the sunk-cost effect is even more relevant than most.
Granted, the piece hinges on Jets quarterback Mark Sanchez. But please bear with me ...
The Jets have stumbled into a classic economic dilemma, known as the sunk-cost effect. In a purely rational world, Sanchez’s guaranteed salary would be irrelevant to the decision of whether or not to start him (since the Jets have to pay it either way). But in the real world sunk costs are hard to ignore. Hal Arkes, a psychologist at Ohio State University who has spent much of his career studying the subject, explains, "Abandoning a project that you’ve invested a lot in feels like you’ve wasted everything, and waste is something we’re told to avoid." This means that we often end up sticking with something when we’d be better off cutting our losses—sitting through a bad movie, say, just because we’ve paid for the ticket. In business and government, the effect pushes people to throw good money after bad. The quintessential case of this is the Concorde. There was never a convincing business case for the supersonic airliner, and there were numerous attempts to kill it. But those attempts all failed, in large part because of the billions that had already been spent.
Quarterbacks and outfielders and pitchers aren't supersonic airliners (or wars in Afghanistan, or any of the other things that cost a lot more than quarterbacks and outfielders). I'm not even sure if there are any baseball players like Mark Sanchez. As Surowiecki notes, it's not just that the Jets kept playing Sanchez last season. Despite already having him under contract, the Jets signed Sanchez to an extension.
When you've got a bad contract on your hands, there are three costs:
The financial cost is obvious, and the easiest to measure. Of course, on paper it should essentially be ignored when considering the feasibility of releasing (or trading) a player. The money's already spent, so get it out of your head.
The opportunity cost is sometimes obvious, sometimes not so obvious. Having Vernon Wells under contract in 2012 might have kept Mike Trout in the minors for an extra month, which might have cost the Angels a playoff spot and probably cost Trout the Most Valuable Player Award.
Usually there's not someone like Trout waiting in the wings. There have been times, in the last years, when you could reasonably have argued that the Giants should just release Barry Zito. An immediate response would have been, "Sure, but do they have anybody better to replace him in the rotation?"
Usually, the answer was no, they didn't. But that's sort of begging the question. If the Giants had released Zito, they might have been slightly weaker in the short term ... but that empty slot in the rotation would have been glaring, and addressing that need with some urgency might have made the Giants stronger in the long term. A general manager should always be trying to improve his roster wherever he can. There's really no way for Brian Sabean to improve on his No. 1 starter (Matt Cain) ... but where most GM's work on improving their No. 5 starter almost every year, Sabean's hands are tied there, because of Zito's contract.*
* This is where I recall that many of us, and probably even me, predicted that Sabean's hands being tied would mean big problems for the Giants in the coming seasons. This was a few minutes before they started winning the World Series every other year. It's always good to remember that one player's contract, no matter how big, usually won't make a huge difference in a club's fortunes.
Another example of a sunk cost leading to an opportunity cost? If the Royals weren't committed to paying Jeff Francoeur nearly $7 million this year, would they have been so willing to trade Wil Myers? Well, that's hard to say; they seem to have been pretty intent on acquiring a good starting pitcher. Maybe Myers was gone, regardless of which outfielders were on the 40-man roster. But Francoeur's salary essentially guaranteed him an every-day job with the 2013 Royals. And might have cost the Royals one of the best young hitters on earth.
And finally, there's the psychic cost of the bad contract. It just hurts, making a mistake like that. It probably hurts the least if you just dump the contract, and the player continues to struggle. It probably hurts more if you keep the player, and he continues to struggle. But it probably hurts most if you dump the contract, and the player thrives somewhere else. Or maybe it doesn't hurt the most, but instead looks the worst.
How often does that happen, though? I don't know. Enough to scare people, I guess.
Looking around, I don't actually see a lot of current situations where a club's apparently fallen prey to the sunk-cost effect. We're probably going to see it soon with Alex Rodriguez, though, and later with Mark Teixeira, Derek Jeter, and any number of Los Angeles Dodgers.