The Winner's Curse - Oil Field Economics and Baseball

Is a baseball player really like an oil well? He is in that some estimation to his value can be made with the data available, but his future value (what the owners are bidding on) is in many cases an open question. How much will a thirty-year-old outfielder with a .280 batting average and 30 homers a year be worth over the span of his next contract? $5M a year? $7M a year? It's hard to guess, especially when the future free-market value of his competition is factored in. How fast will the average salary rise over the next three years? (Note that the oil companies need to make a similar calculation - they need to not only estimate the amount of oil in the ground, but they also have to make an estimation of the future price of oil) It's easy to see how several different teams could make very different estimations of the value of this player. And the team that signs him in the end is the team that was the most optimistic about his value. Like an oil company, this optimism could leave them well in the red.

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