FanPost

Opportunity Cost and Future Value

There is a complex argument to be made as re: how we use our cap room in Free Agency, aligned with our long term strategy of asset acquisition and our recent tactic of tanking to advance that strategy. Many argue that we should take on contracts like Boozer and Dunleavy, along with some picks, fail to make even at attempt to make the playoffs this year, and as a result also keep our 2015 1st round pick in the lottery vs two late second rounders in 2015 and 2016. Some even argue that we should not spend any money at all to get to the league minimum of 56.7MM, just allocating out our excess $22MM in cap room to existing players to guarantee our tanking and ensure our 1st round pick. So let’s try a couple thought experiments:

Experiment #1 - not spending anything and spreading the $22MM among our existing players carries an opportunity cost of $22MM – money spent essentially on nothing – since we could purchase our current roster for $22MM less otherwise. The argument here is to the future value of keeping our 2015 1st round pick – but the opportunity cost is self-evident. We might get significantly more value – current and future – by spending that $22MM wisely.

Experiment # 2 – one year from today, which player will have the higher value – Lance Stephenson or Avery Bradley? In isolation, mostly you will get no argument that Lance Stephenson has a higher future value – either as a player on our team in 2015 and beyond, or strictly as an asset that can be moved in deals for other assets down the road. It is also self-evident that Stephenson has a greater current value than does Bradley as well – only the risk inherent in losing our own 2015 #1 pick by taking Stephenson over Bradley must be weighed into the total valuation equation.

Experiment #3 – doing the Boozer/Dunleavy plus picks deal – clearly one year from today, Boozer and Dunleavy, no longer under contract, carry zero future value for the Sixers. Again, the $22MM represents an opportunity cost, with no direct future value to the team. Therefore their only future value, which is significant, is in helping a re-tanking effort, to preserve our 2015 1st round pick, plus whatever picks we get in the trade. And there is still some risk that they push us to some additional wins, either losing our #1 pick contra to the plan, or at least devaluing it by moving us to a worse pick within the lottery – the latter of those possibilities with some significant likelihood. They will also eat up some significant playing time, to the detriment of our rookies, although they may offset that by enhancing the rookies’ experience in terms of team building, avoiding the negative atmosphere of another pure tank season, and by passing along their veteran experience to some extent. This is always going to be a grey area, and not the black and white picture some my paint. Note also that the Sixers do not operate in a vacuum where they can do whatever they may choose – there are 29 other teams in the league, such as Utah, for example, that may be bidding against you for the same deal with Chicago, and which will tend to reduce the value you can get back in terms of the quality of the future picks as a result. Another grey area – nothing is black and white in the real world.

Experiment #4 – signing a pair of quality free agents – just as an example take Stephenson and Luol Deng (feel free to substitute any two names of your choice) – signing those two carries a significant risk of losing your 2015 1st round pick, and ending up with late second round picks in 2015 and 2016. This represents a serious hit to future value. But in return you retain the full opportunity cost of $22MM since the money will improve your 2014 team considerably. But you also gain significant future value back – both of these players are assets to your team in 2015, either as players to use in building your contender, or as assets that can be flipped down the road for other assets that are a better fit.

Sam Hinkie and the Sixers have made it very clear that they are following a long term strategy designed to acquire the maximum assets, and eventually to turn those assets into a multi-year or perennial championship contender. Tanking is merely a tactic in that strategy, and will be discarded sooner or later, at the appropriate time – no one of course wants to tank forever. Therefore the question is extremely complex, and hinges on opportunity costs and future value – and the tipping point between those two may be reached at any moment, now or later, but it will be reached eventually. At the end of the day it may well be that for 2015 tanking still makes sense, and that the 2015 draft with a couple 1st round picks represents the best total return in future value. But it is worth thinking about and constantly re-evaluating that analysis as we proceed through this summer’s free agency period and beyond. Because other options also carry significant future value, and very different opportunity costs.

A user-created LB joint. The Liberty Ballers staff does not contribute to FanPosts.

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