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Monday, December 27, 2010
Future dollars for future wins
Every single person in the world should be paid (i.e., future dollars) on their expectations to produce (i.e., future wins or future production). If you want to be paid for past performance, that’s called a bonus.
So, I am dismayed by this article:
http://marcysin02.blogspot.com/2010/12/what-free-agent-worth.html
Which, to be fair, is similar to many other articles: future dollars for past performance. To be further fair, this is like a stock’s P/E ratio (price per earnings; the price is the discounted value of all future earnings, and E is the PAST earnings.... as you can see, P/E ratio is silly when taken to its logical conclusion).
Please, please, please, stop comparing a player’s upcoming salary to his past performance.
Now, when you compare his future dollars beyond one year to future performanace beyond one year, you need to discount that back so that each season’s salary is based on the same currency. 2011 dollars is not the same as 2016 dollars. This is called the Time Value of Money. You can, also, think of the Time Value of Performance. Basically, if you get an expected 4 wins in 2011 or 4 wins in 2015, are you going to pay the same for it (using 2011 dollars)? No, you’ll probably ask for a bit of a discount. For example, maybe you’ll be just as happy with 3.5 wins in 2011 as with 4 wins in 2015 (that you would pay the same). Maybe?
So, when doing what that blogger intended to do, you’ve got a few hurdles you have to clear before you can reach a conclusion.
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