Examining a Sunk Cost Effect in the Managerial Decisions of Major League Baseball
Date
2011
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Haverford College. Department of Economics
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eng
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Open Access
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Abstract
This paper investigates the existence of a sunk cost effect in the decision making processes of the Major League Baseball clubs’ management. This study builds on previous research, which points to an influence of these prior investment costs on decisions in the National Basketball Association. Since in a drafting system team franchises only can make a one player selection per round, the draft order represents a tangible cost to teams both in opportunities forgone and the financial investment of salary contracts. If a sunk cost effect is present, then a franchise will keep a player regardless of the player's performance because of the prior investment made in the player. Using OLS, Logit, and survival analysis models, 7681 players were analyzed over 20 draft years, 1985-2005. Findings showed that a player’s overall draft pick had a significant effect on games played and number of at bats. The higher (lower numerically) a player was drafted; the greater was the probability that the player would reach the Major Leagues. Additionally, survival analysis results showed that low draft picks made it to the Major League teams quicker.