Weird Science: Time To Rethink Fantasy Sports Auctions

Nov 17, 2009

Arguments, Drafts/Auctions, Weird Science

Weird Science will be a semi-regular column that proposes and sometimes tests big-picture ideas on ways that fantasy competitors can evaluate players and league structures.

By Brian Mills

In the discipline of experimental economics, researchers investigate game theory, bargaining, and incentives to test new market mechanisms. One popular subject of critique has to do with auctions.

Throughout the years, auctions have been a popular way for fantasy competitors to roster ballplayers. But are fantasy leagues using the best, most efficient, and most fair type of auction out there?

To answer that question, we must first classify the three most popular types of auctions.

auction2006-live First, there’s the so-called “Dutch Auction.” In this format, the auctioneer starts by announcing a high price and continues to lower the price until a bidder accepts. We can think of “snake drafts” to be essentially like this as competitors attempt to attain the best talent with the lowest possible draft investment.

Second, there’s something known as the “English Auction.” When most people think of auctions, they typically think of this format where the open bidding starts low and competitors take turns attempting to outbid each other. Highest bid wins.

Third and finally, there’s the style known as “Sealed Bid Auctions.” In this type of format, bidders each make just one blind bid without knowing the bids of other people in the auction. Sometimes, these auctions operate as “First Price,” whereby the most aggressive bidder pays the exact bid made. And sometimes, these auctions operate as “Second Price,” otherwise known as “Vickrey,” where the most aggressive bidder pays an amount slightly higher than the second most aggressive bidder.

In terms of fantasy sports, most leagues use variations on either of the first two formats during the preseason to place players on rosters. Some leagues have begun to adopt the third format, popularly known as the FAAB system, during the course of a season as a mechanism for placing free agents on teams.

I’d like to argue that leagues should adopt Second-Price Sealed Bid Auctions even in the preseason.

The object of fantasy sports should be to reward the smartest, best prepared competitors. Fantasy leagues have adopted auctions because they promise the most efficient way of determining the best competitors from the worst.

auction-guy However, the problem with open-style English auctions is something that economists call “complete information,” where competitors have too much knowledge about their fellow league-mates, most particularly, the way others value players. Teams reveal their preferences by “signaling.” In the same way that a collector of rare memorabilia may signal a counterfeit or genuine item by a price bid, often a fantasy competitor will signal whether they think a player is a legitimate 40 HR threat or a 10 HR turkey by making an open bid.

Some leagues have legitimate experts who spend all day on the Internet researching sabermetrics. The uninformed owner doesn’t need to expend much effort doing the same. If he’s smart, all he’ll need to do is watch the expert and bid accordingly. This adds up to a “winner’s curse,” where league champions are punished because of past success.

OK, every team in a fantasy league typically has a salary cap, and perhaps the outbidding of experts isn’t much to cry over. But don’t we want a system that rewards preparation, knowledge, and talent evaluation? Instead, most leagues have systems set up that reveal a lot of information and encourage strategy as the predominate skill.

Certainly, auction strategy is a much discussed topic and is a lot of fun — Fantasy Ball Junkie has written articles on the topic — but English auctions can breed a lack of fairness.

I also think that “second price” is the way to go. If we take a look at FAAB systems that have already adopted sealed bid auctions, we see that “first price auctions” encourage competitors to bid what they expect a free agent to be worth whereas “second price” auctions encourage bidding of the true value. I like leagues where competitors don’t have to worry about what other league-mates are doing.

Many people may disagree with me. We can debate in the comment section.

7 Comments

4 Comments

Millsy • Nov 17, 2009 @7:10 pm

A note on the “winner’s curse”. The winner’s curse in the article is actually misrepresented a bit. A winner’s curse happens fairly often in an auction when someone wins any player. Given no one was willing to outbid them, there’s a good chance that they overpaid. In the world of auctions, that is how the winner’s curse is usually defined.

Here, the idea in the article is that by winning previously, you’ve already signaled to the rest of the league that you know what you’re doing. If they recognize this, and you reveal more information in the auction, they’re likely to follow suit through reevaluating their valuation. While it is a curse for the winner, it’s not necessarily the same as a “winner’s curse” in terms of auctions. When you win, people know who you are…and they’re out to get you. Just ask Phil Hellmuth!

With the English auction, you ultimately get lots of valuations right in line with each other due to the interdependent auction values. Bidders who originally thought a player was worth less now see other bids and decide their original valuation may have been incorrect. Hence the phenomena of interdependent values, which happens in collectible bidding.
danduke • Nov 17, 2009 @8:22 pm

Millsy – I had noticed the same thing RE: “winner’s curse”, and was going to ask about it. Good observation.

Brian – The language of the last paragraph threw me a bit. What’s the difference between “worth” and “true value”? If by “be worth” you mean “cost to win”, then I agree with you. Further, if you are proposing a sealed-bid system for drafting rosters then I LOVE that idea. Good thoughts here.
Millsy • Nov 18, 2009 @6:28 am

For those of you confused, Milly = Brian Mills. Sorry about that, this was my Wordpress name for a while now. Perhaps I should change this for this site.

I think the ‘worth’ and ‘true value’ part is also confusing. I apologize for that and I guess I hadn’t read the edit carefully enough. That’s my fault. I’ll try to make clear the differences in bidding for first price vs. second price auction here.

In a first price auction, bidders still can try to anticipate what others are going to do. In this case, with uncertainty around the item up for bid, the fantasy owner does not always bid the price at which he/she thinks the player will be worth. Rather, there is ‘bid shading’ that takes place in order to try and get the player at a price lower than your valuation (getting him at your valuation gives you no surplus and risks the winners curese, especially with uncertainty). There is more anticipation of your counterparts here depending on the number of bidders and the supply of players, though all auctions theoretically become efficient due to the Revenue Equilibrium Theorem. In this auction, you want the highest bid, but not “too” high, or there isn’t return on investment.

The argument for the Second Price auction is that there is a dominant strategy. In the second price auction you always want to bid your valuation (in fantasy, we want everyone to bid what we think the player is worth). Because you pay the next highest bid (or some small increment above it, say $1), there is not reason to shade your bid. The only time you pay your valuation is if someone bid only $1 less than you. There is also no advantage to bidding higher than your valuation, as doing that would risk netting you the player at a price you don’t want him (or essentially a loss of surplus value). This makes the auction much more clear and requires more reliance on the valuation model each player has.
Millsy • Nov 30, 2009 @7:33 am

UPDATE:

I found a custom fantasy league website that does allow for sealed bids, which is kind of neat. I say why not have it as an option for all leagues? Of course, it’s all a matter of preference, but I don’t think it would be that difficult for a site like ESPN to implement it as well. Their Live Auctions were a hit for me this year!

For the life of me, I can’t find the link right now (I was at the family’s house when I found it). But it’s nice to know that others have been thinking about this as well.