Understanding the Trade Market: The Layers of Asset Values in the NBA

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Published: January 31, 2014
Understanding the Trade Market

“Nowadays people know the price of everything and the value of nothing.”

- Oscar Wilde, The Picture of Dorian Gray

 

This little quip from Mr. Wilde would eventually be co-opted to mock economists as people who know the price of everything and the value of nothing. For non-economists, the point of this phrase was to show how cold and calculating economists are. For economists, this phrase captures the difficulty associated with explaining the exchange value or the price of goods and services. In short, we can tell you the price of something, but we can’t give you a full theory about how we arrived at that price or what it is really worth.

This is mainly because there seems to be several mechanisms responsible for prices, and prices seem to be a poor proxy for value. A quick look at Wikipedia will show at least half a dozen different theories for how goods reach certain prices. In my opinion, most of these theories are not directly opposed. In fact, to really understand value we need several theories and explanatory frameworks. I do need to mention that prices and money have nothing to do with the type of values this article discusses. There are as many ways to think about value as there are ways to explain prices, but for this article, think of value as measure of usefulness in different contexts (e.g. on the court, in the locker room, salary cap etc). In other words, value isn’t what a player costs, but what a player is worth given their production.

In any case, why am I talking about economic theory and Oscar Wilde on an NBA blog? Because like any other asset, there a several different ways of thinking about the values of NBA players. In most cases, we are concerned with the on court value of NBA players, but occasionally the value of player goes beyond basketball. This post is going to focus on the former type of value, while a post in the future will discuss value beyond the court and the cap.

Different Types of Asset Values

I’m going to discuss most of what is mentioned in this first paragraph more in depth below, however I want to define three basic types of value first. Let me use the example of an Archie Manning Rookie Card to make my point. Also, I’m going to use dollars as a proxy for value. I know that may be confusing given what I just said, but sometimes thinking of things in terms of how much we would pay for them can reveal how much we value them.

The first type of value is how you individually value the Card. In this case, you may have an emotional attachment to the card, since it doesn’t have much practical use, which increases its value. Let’s say you value this card at $50. The second type of value is what we will refer to in this piece and series as market value. Think about it as the average price that people are willing to pay for this particular card. Let’s say the market price is $40.  The final type of value is what the card is worth to another single person. That person’s value of the card doesn’t have to be attached to the market price in any way. It is merely what another person is willing to pay.

If another person values a Manning RC at $100, then they are willing to pay above market price to own that card. Of course, you also value your card above market price. Now, we have the question of, “How do we reach an equilibrium price?” That is a bit beyond our focus here, but it basically comes through negotiation and market mechanisms. If you have ever taken a formal class in economics, this probably looks unfamiliar. Don’t worry, you learned something valuable. The NBA is just a unique market place.

It may be hard to see how this relates to the NBA right now, so let’s apply this to the NBA and talk a bit more in depth about each. 

Value on the Court for your Team

This is like the first type of value in the card example, what a player produces on your team on the court. This is a pretty important question, and it isn’t incredibly easy to measure. A lot of advanced statistics are interested in providing a one number answer to the question of a player’s value to a team. The most popular may be Win Shares, but another model created by the sports economists, David Berri, called Wins Produced has also been successful.

At any rate, this can simply be understood as the value of a player to you by what he produces. That production will probably have a major role in dictating what you pay that player. Let’s consider Ryan Anderson. He had a career PER of 18.3 and a WS/48 of .160. Both are well above average, but are not quite elite. Furthermore, his 3-point shooting is a rare skill on this team, which increases his value for the Pelicans. This is referred to as scarcity. Generally, the scarcer a good or service is, the higher the price for that good or service will be.  Since we don’t have many other 3-point shooters, he is relatively more valuable to us than he would be on a team with several 3-point shooting options.

All in all, this is pretty simple and easy to understand. Ryan Anderson, like any other good or service has a unique value for this specific team. It is as simple as that.

Value on Another Team’s Court

Here is where things start to get interesting. Since there certainly are market values for every player (i.e. average values), then each team must have an individual value for a player based on their production, skill set, and contract. This is the third type of value we opened this section with.

The same idea is true for basketball players. One team may value a player on another team more or less than that player’s current team does. Let’s use Ryan Anderson as an example again.  Obviously, his 3-point shooting is very valuable to the Pelicans, who struggle to find 3-point shots without him on the floor. Still, there are other teams that struggle with stretching the floor like the Pelicans, and they may want to add another front court player. These teams will have a value for Ryan Anderson that is greater than the Pelicans value like the person who valued the Manning card at $100. They will assume that adding Ryno to their team will increase their team’s level of production.

The point to take away from this section is that the same good, player, or whatever can have a different value for a different team. This, of course, means that people have different prices they are willing to pay for that good. If the difference between values is great enough and both teams have assets the other team desires, a trade may occur.

Value of what a Player can be exchanged for in a Trade

In my Archie Manning example, we used dollars as a proxy for value. This serves us pretty well since dollars serve daily as a medium of exchange for most of us. In reality, it is a bit silly to think that you have an explicit number of dollars in your head attached to how much value a trading card. Well, dealing with the NBA trade market is even trickier, because we can’t really use dollars as a proxy. Imagine if the NBA trade market were like the stock market. We could get online and search for NBA player values. We could watch player stock prices rise and fall given their production, contracts, and the latest gossip. Life isn’t so simple. That makes determining the market price for a player and the price a team will give up in a trade for another player. Basically, it is harder to deal with draft picks and NBA players as a medium of exchange than to deal with cold hard cash. In any case, let’s discuss the idea of what another team will give up for a player in a trade.

As we said earlier, Ryan Anderson has a certain value to the Pelicans based on what he produces. He also has value in what he can command in a trade. I suggested you think of Ryno as having a set value. He has certain physical characteristics, skills, and other variables that create his value. However, that value is dependent upon where he is playing, because some teams may have a preference for players with a different skill set than Anderson. This means that Ryno has a relative value for each team. In other words, some teams want a 3-point shooter more than others, like Memphis or Charlotte. Other teams already have enough 3-point shooting and have other needs, like Golden State and Portland. Given the different needs and preferences of these two groups of teams, their offer for Ryan Anderson in a trade is bound to be different. In short, some teams will want him more, so they will give up more for him.

Compare him to Eric Gordon. There are constantly rumors about trading Anderson. However, Gordon seems to be untradeable due to his contract. This seems to suggest that his immediate value on the court is never greater than the cost of acquiring such a massive contract for the long term. If his contract was on its last year, though, he might be the most valuable trade asset in the league. Large expiring contracts are so valuable, because they allow salary cap flexibility for free agency. This means that as the length of his contract decreases his value will go up. That is a pretty strange caveat when you consider that some players have to agree to an extension before being traded like the CP3 deal to LA.

At any rate, the point here is simple. Players also have a value on the open market that may be different than their value to a team. This might be the catalyst for a trade.

Opportunity Cost

I just want to throw in one more point before I sum this piece up. There is not a more fundamental and more misunderstood concept in economics than opportunity cost. I have no idea why it is often misused, but it has become quite the wrong buzzword on certain blogs and twitter feeds. Often, when a sports writer cites opportunity cost when writing about players, what they really mean is financial or monetary cost. That is to say, what a team paid for a player. That is not at all what is meant by opportunity cost.

Opportunity cost is the value of the best alternative not chosen. Okay, that probably wasn’t very helpful. Opportunity cost comes up anytime you make a choice. The value of the opportunity cost is the value of the thing you did not choose. The NBA free agent market is actually a good example of opportunity costs. Teams have a finite and set amount of money to spend due to the cap. When team’s spend money on one player, they are choosing to not spend it on another or several others. Using the Pelicans as an example, Eric Gordon’s contract is worth about 15 million per year, but that isn’t his opportunity cost. The opportunity cost of signing Gordon was the value of the other players we could have signed for those 15 million dollars. This could be described as the value of the cap space associated with the player.

Though our example dealt with the free agent market, opportunity cost is also relevant in the trade market. This should be obvious, since every trade is basically a choice to exchange some assets for some others. If a team chooses to trade a player, for example, they face the opportunity costs of keeping that player on their roster. In many cases, keeping a young player for the long term may provide more value to a team than what they acquired in a trade. Of course, the opposite can also be true.

Importance of Asset Value to the Trade Market

I took a couple of pages to dive deep into different types and ways to think about the value players have on the trade market. It might have all seemed pretty academic up until this point, but hopefully I can add some practical relevance in this last section.

First off, one team cannot coerce another team in to making a trade. That means that means that when a team makes a move they believe it will ultimately benefit them in some way. Sometimes teams are just wrong and make bad trades. Other times, the benefits of a trade aren’t very obvious, and at first glance, that trade may seem like a bad one. Again, this returns us to the concept of value. Take the Tyshawn Taylor trade for example. When the trade first happened, many thought it made no sense because he didn’t have much value on the basketball court. However, the trade and Tyshawn Taylor’s contract did have a business and financial value. The team was able to make around $600,000, and the latest rumor is that some of this money will be used to buy out a player’s contract with a foreign team (Luke Babbitt).  The value of that first trade was financial, but it may ultimately came back to have some immediate on the court value.

If you ignore everything else I wrote I hope that you take away this simple piece of information. There are multiple types of value. To really understand a trade, you need to go beyond the immediate on the court value and consider some of the other types of value I have mentioned. Also do this when you suggest a trade to a writer here. Consider what the market price is for a player, before asking us why we haven’t traded Aminu for Michael Kidd-Gilchrist. Understanding and analyzing trades is a tricky and nuanced business, but it all starts with understanding and measuring value.

 

15 comments
xman20002000
xman20002000

How is it true that Eric Gordon is not trade-able..  There are varying examples of large contracts that were traded..  Bynum, Okafor, Joe Johnson....  Imaging Gordon playing with a more talented team..  He turned us around last season and appears to be working out just fine.. especially absent Holiday and Anderson...  Is he more reliable than Evans..   Gordon had an opportunity and got the max out of it.. but there are lots of teams that would pay him... 

504ever
504ever

I hope everyone on this site remembers this quote for years and remains patient:

"... [Eric] Gordon seems to be untradeable due to his contract. This seems to suggest that his immediate value on the court is never greater than the cost of acquiring such a massive contract for the long term. If his contract was on its last year, though, he might be the most valuable trade asset in the league. Large expiring contracts are so valuable, because they allow salary cap flexibility for free agency. This means that as his contract [length] decreases in time his value will go up."

NOEngineer
NOEngineer

The NBA goes to great lengths to corrupt the marketplace, to prevent the richest teams from setting the price too high for the poorer teams to afford.   If they didn't, it would be even more difficult for the Pelicans to hope for a playoff or championship team some day.   The Lakers or the Russian would simply put together a team with 8 of the best players available and dominate. 

The value of a player is based on his past and projected performance.  Since Ryan was mentioned, we can look at him.  His past performance has been above average, but his injury makes it difficult to project his future performance.  Besides injuries, players' performance trajectories have been influenced by their attitude, their coach, their teammates, or their off-the-court troubles.     

The famous Peter principle (people will rise to their level of incompetence) applies to basketball.   Gordon gets paid huge sums because he is a great complementary scorer, but when asked to rise to the level of a team leader and superstar, he has thus far failed.   Many college starts rise to the NBA to fail in flames.   Michael Jordan found baseball.   It takes a disciplined and self-aware genius to rise to the top and stay there without over-reaching.   They know their value and can keep it high.   Let's hope AD is that type of man, and that he also has the loyalty and wisdom to stay associated with the Pelicans like TD has done with the Spurs.

AndrewDenenea1
AndrewDenenea1

Economic Major saying why do we calculate Real GDP and Utility Values then, also I hate that book The Picture of Dorian Gray. So I am ok with ruining the line.

Nicks65
Nicks65

@xman20002000  

This piece was already over 2,000 words long. I didn't want to take time to breakdown the EG situation. You are right he is not completely untradeable. 
Here is what I said in another comment. 


"I only mentioned Gordon regarding player value in the trade market. My point was basically that Gordon has a value on the court, because he does produce on the court. However, the immediate value for that production is not worth the burden of his contract. That is why he is untradeable without increasing the value of a Gordon trade package with a sweetener or finding the perfect desperate team."

Now regarding your examples of big contracts that got traded. 

Bynum - had an expiring deal. I mentioned the value of expiring in the article


Joe Johnson - Traded to a "desperate" team in Brooklyn. They didn't care about the expensive of his contract. They just wanted to add some players and win at all costs. I mentioned that in my comment. 


Okafor - A swap for Tyson Chandler where contracts were pretty much equal. Then traded for Lewis and a draft pick, which became Darius Miller. IMHO, the second trade was a salary dump where the Wiz threw in a sweetener. 


So, yes I agree that EG could be traded, but it will take the right situation (a desperate team or the right trade package). For the sake of the length of this article, I ignored most of that. 


The only thing I'll disagree on is the number of team's willing to pay the max for EG. Just my opinion, but I don't think a lot of teams look at that deal and see a beneficial contract.

macs21
macs21

@504ever However, at next seasons trade deadline when the T-Wolves are looking to move Love because he's gonna opt out and doesn't want to re-sign with them his contract will have less than a year and a half on it.

We could send them Ryno, EG and our 2016 first rounder for K-Love. Seems like a solid offer to me.

Holiday, Tyreke, Miller, Brow, Love.
You could underpay veterans to come and play with that core!

Jason Calmes
Jason Calmes moderator

@AndrewDenenea1  values of a large collection of assets in a very large `flat' market are much easier to understand than that of a single asset or two. It's much easier to understand the value of all hamburgers than that of the most recently produced hamburger. Utility values are points on a utility curve, a tool used to understand the convexity of demand, and whose values mean nothing in themselves; only differences in values matter in that crude, limited, though useful, model. 

Try to stay on the topic, too.

There are ways to suggest changes to articles, and it's listed. Handle things in the requested manner, please.

504ever
504ever

@Nicks65 @xman20002000

You can trade Gordon but you will have to take back at least one under performing contract.  Maybe you can get a much lower performing player (or two) on a slightly shorter but similar salaried contract.  Why do that now when Gordon will be worth much more later? (That, too, is an opportunity cost.)

AndrewDenenea1
AndrewDenenea1

@Jason Calmes @AndrewDenenea1 Not trying to ruin the article (just the Picture of Dorain Gray) I actually like it because he is basically explaining consumer preferences and scarcity in a economy; the economy being the NBA. The consumer preferences, causing the pelicans to have more value or Utility in owning Ryan Anderson's rights compared to Eric Gordon's. Eric Gordon's utility is damaged because we have three or four substitutable goods (Holiday, Roberts, Rivers and Evans) making his marginally utility slight because of the substitute goods are cheaper and some of them could have a longer shelf life for example Rivers. While Ryan Anderson's marginally utlity is large because there are few subsitute goods (stretch 4's) in the marketplace rather than in our one firm.

*(SPOILER)Yes, I may have an irrational hatred of The picture of Dorian Gray but who hasn't taken a picture you do not like and tried to destroy it.

Also had to leave for class and couldn't finish my comment.

Nithenz
Nithenz

@xman20002000 Guess you didnt pay attention to what i said... I have no idea about Dells plan...And looking at his record, i think anyone has an idea until a trade is done with him, but Gordon is the only player not brought in by Dell. (Dell resigned Aminu. That's an explication why everyone thinks that could be the next one to move. And yes, Gordon and Holiday are not playing well together, and i guess most think Holiday is a keeper, so guess who could be the goner?


xman20002000
xman20002000

@Nithenz @xman20002000  Funny so Demps shared his plans with bloggers and the media... and I am not related to Gordon...  then please advise how EG"doesn't fit the rest of the parts"... Holiday or AD doesn't play well with EG... and who is out there available to us...  or is it the fact that he was able to pull a few million out of management... I don't get it...and I have seen all the games..Who do fans like..

Nithenz
Nithenz

@xman20002000  Maybe just because he is no part of Dell's future plans? Or maybe because we could get a better fitting player/s? Or Maybe they want someone more consistent? or just a player that shows up every quarter?

I now someone can love a player, but, sometimes you sound like if you were Gordon's brother...or cousin...who knows...Just blinded and not wanting to see a bigger picture. EG is not a bad player, but he certainly doesnt fit with the rest of the parts. Have you notice also that him is the only of the big 5 that wasnt brought in by Demps, but he came over after Stern vetoed LAL trade...isnt that other indication why everyone thinks he is the player that will be traded if a posibility arises.

xman20002000
xman20002000

@Jason Calmes Far too much focus on Gordon and whether or not he is traded...  when it appears he is doing just fine... We are missing 3 players ... so why trade Gordon... LOL... it makes no sense..

Jason Calmes
Jason Calmes moderator

Discussing someone's value with facts is not "hatin."

If you truly are a fan of Gordon, you will learn more about him, his game, and what affects his career. His contract and history are influences. Mentioning this... Spending time of Gordon... That is not "hatin." Skewing or cherry-picking facts might feel that way. Attacking him as a man rather than discussing his statistics may feel that way. None of that is going ok here.

xman20002000
xman20002000

@504ever @Nicks65@xman20002000  So other than Roberts and Evans in the backcourt why should we trade Gordon and if he isn't going anywhere... why are some of you always HATIN on Gordon... one of our better players... There was discussion of Gordon going to the Bulls... then what does our backcourt look like...