So, @RapSheet tells us Julian Edelman could be worth $7M/year on the open market

[kennyb]

I got my degree from the USAFA. Sorry that you're appalled, had I known that you were so emotional over higher education I wouldn't have engaged in this discussion with you.

The Patriots made an initial up front investment in Amendola the return on that investment would come in the form of his production and contributions to the success of the team. It is not unrecoverable unless they sever ties because it can be returned by his play moving forward.

If you go to the dealership to buy a car you pay an upfront cost. Is that a sunk cost?

Yes, that'd be a sunk cost. It'd be more complicated as you probably have a warranty, but if you bought a used car "as is", then it's SUNK.

Wilfork is the best example as he's in the last year of his contract. If he plays for 7.5M this year or if he doesn't, then it's true that this affects the analysis of whether the original contract was a good investment or bad. But the past costs are still sunk. You have no control over them nor can you get them back. You need to look forward and ask: "what do I pay vs. what do I get".

You pay 7.5M you get Wilfork for one year. Maybe that's good, maybe not. Maybe you'll pay hiim 7.5M and he'll play great and the original contract will have been a bargain. That depends on how much was spent way back when and how good he was until now...but that's needless complexity and irrelevent to the decision at hand. Do you pay 7.5M for one year or not. "But we paid 40 million over the past 5 years...might as well pay another 7.5M", doesn't make economic sense.

Let's assume Wilfork is done and he outplayed his contract until now. What good would it do to spend 7.5M and get nothing? "But it was a bargain still considering how good he played for the FIRST years of the contract!". Mabye, so, but you'd spend 7.5M on nothing? Kind of like if someone gave you $1000 you'd take a hundred out and burn it and walk away thiking "$900 is still a LOT OF MONEY!". That is not rational.

Let's assume we know Wilfork is 100% and clearly worth 7.5M. Then you should pay it, even if the original signing bonus was way too much.

If you spend $40K on a car that turns out to be a piece of junk and you know with perfect knowledge that an additional $1000 in repairs will make the car run and be worth $20K....do you do it? If you don't do it the car is worthless. Ideally, you'd go back in time and not buy the car, but since you can't do that, it's pointless to worry about the sunk cost.

With Amendola it's more compliated as by keeping him next year you also have the rights to him for following years at a reasonable salary. So if you cut him, you lose those options to keep him on in later years. But the past salary and signing bonus shouldn't enter into it.

 

[BradyFTW!]

Yes, that'd be a sunk cost. It'd be more complicated as you probably have a warranty, but if you bought a used car "as is", then it's SUNK.

Wilfork is the best example as he's in the last year of his contract. If he plays for 7.5M this year or if he doesn't, then it's true that this affects the analysis of whether the original contract was a good investment or bad. But the past costs are still sunk. You have no control over them nor can you get them back. You need to look forward and ask: "what do I pay vs. what do I get".

You pay 7.5M you get Wilfork for one year. Maybe that's good, maybe not. Maybe you'll pay hiim 7.5M and he'll play great and the original contract will have been a bargain. That depends on how much was spent way back when and how good he was until now...but that's needless complexity and irrelevent to the decision at hand. Do you pay 7.5M for one year or not. "But we paid 40 million over the past 5 years...might as well pay another 7.5M", doesn't make economic sense.

Let's assume Wilfork is done and he outplayed his contract until now. What good would it do to spend 7.5M and get nothing? "But it was a bargain still considering how good he played for the FIRST years of the contract!". Mabye, so, but you'd spend 7.5M on nothing? Kind of like if someone gave you $1000 you'd take a hundred out and burn it and walk away thiking "$900 is still a LOT OF MONEY!". That is not rational.

Let's assume we know Wilfork is 100% and clearly worth 7.5M. Then you should pay it, even if the original signing bonus was way too much.

If you spend $40K on a car that turns out to be a piece of junk and you know with perfect knowledge that an additional $1000 in repairs will make the car run and be worth $20K....do you do it? If you don't do it the car is worthless. Ideally, you'd go back in time and not buy the car, but since you can't do that, it's pointless to worry about the sunk cost.

With Amendola it's more compliated as by keeping him next year you also have the rights to him for following years at a reasonable salary. So if you cut him, you lose those options to keep him on in later years. But the past salary and signing bonus shouldn't enter into it.

This is the best description of sunk costs that I've read here. Specifically, whether or not a cost is sunk has literally nothing to do with whether or not it was a worthwhile expenditure. They are two entirely different things. There are sunk costs that are bargains and sunk costs that were terrible wastes of money - neither makes a cost any more or less sunk.

Any cost that is unrecoverable is no longer relevant to the decision-making process because it is a sunk cost. If you sign Tom Brady and give him a $1M signing bonus, that's a sunk cost. If you sign Mark Sanchez and give him $30M guaranteed, that's also a sunk cost. The fact that one's a great investment and the other is god-awful just doesn't matter. They're not recoverable, and therefore they're sunk.

 

[Brady6]

Yes, that'd be a sunk cost. It'd be more complicated as you probably have a warranty, but if you bought a used car "as is", then it's SUNK.

Wilfork is the best example as he's in the last year of his contract. If he plays for 7.5M this year or if he doesn't, then it's true that this affects the analysis of whether the original contract was a good investment or bad. But the past costs are still sunk. You have no control over them nor can you get them back. You need to look forward and ask: "what do I pay vs. what do I get".

You pay 7.5M you get Wilfork for one year. Maybe that's good, maybe not. Maybe you'll pay hiim 7.5M and he'll play great and the original contract will have been a bargain. That depends on how much was spent way back when and how good he was until now...but that's needless complexity and irrelevent to the decision at hand. Do you pay 7.5M for one year or not. "But we paid 40 million over the past 5 years...might as well pay another 7.5M", doesn't make economic sense.

Let's assume Wilfork is done and he outplayed his contract until now. What good would it do to spend 7.5M and get nothing? "But it was a bargain still considering how good he played for the FIRST years of the contract!". Mabye, so, but you'd spend 7.5M on nothing? Kind of like if someone gave you $1000 you'd take a hundred out and burn it and walk away thiking "$900 is still a LOT OF MONEY!". That is not rational.

Let's assume we know Wilfork is 100% and clearly worth 7.5M. Then you should pay it, even if the original signing bonus was way too much.

If you spend $40K on a car that turns out to be a piece of junk and you know with perfect knowledge that an additional $1000 in repairs will make the car run and be worth $20K....do you do it? If you don't do it the car is worthless. Ideally, you'd go back in time and not buy the car, but since you can't do that, it's pointless to worry about the sunk cost.

With Amendola it's more compliated as by keeping him next year you also have the rights to him for following years at a reasonable salary. So if you cut him, you lose those options to keep him on in later years. But the past salary and signing bonus shouldn't enter into it.

This is the best description of sunk costs that I've read here. Specifically, whether or not a cost is sunk has literally nothing to do with whether or not it was a worthwhile expenditure. They are two entirely different things. There are sunk costs that are bargains and sunk costs that were terrible wastes of money - neither makes a cost any more or less sunk.

Any cost that is unrecoverable is no longer relevant to the decision-making process because it is a sunk cost. If you sign Tom Brady and give him a $1M signing bonus, that's a sunk cost. If you sign Mark Sanchez and give him $30M guaranteed, that's also a sunk cost. The fact that one's a great investment and the other is god-awful just doesn't matter. They're not recoverable, and therefore they're sunk.

You seem to be missing that these things are not like for like exchanges. If you go buy a car you invest $25K for it, the return on the investment comes in the form of using the car not a return of the money you spent on it. A NFL contract is the same it is not a like for like exchange; the team gives the player money as an investment, the return on that comes in the form of production.

Aaron Hernandez is a sunk cost, we made an investment in him, and he is unable to recover because he is unable to provide the team with production.

 

[kennyb]

You seem to be missing that these things are not like for like exchanges. If you go buy a car you invest $25K for it, the return on the investment comes in the form of using the car not a return of the money you spent on it. A NFL contract is the same it is not a like for like exchange; the team gives the player money as an investment, the return on that comes in the form of production.

Aaron Hernandez is a sunk cost, we made an investment in him, and he is unable to recover because he is unable to provide the team with production.

No one is missing that it's not a "like for like exchange".

So your contention is that there are no "sunk costs" unless a player no longer plays for a team or a project is cancelled. And you majored in economics?

Here's a simple definition:

In economics and business decision-making, a sunk cost is a retrospective (past) cost that has already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken.

In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision. Traditional economics proposes that economic actors should not let sunk costs influence their decisions. Doing so would not be rationally assessing a decision exclusively on its own merits.

--------
But according to you, there is no such thing as "sunk costs" until the player is cut or the contract is over or the project is cancelled. The above definition refers to costs as being "sunk" before the decision is yet made.

Or maybe they're not taking into account that it's not a "like for like transaction".

 

[BradyFTW!]

You seem to be missing that these things are not like for like exchanges. If you go buy a car you invest $25K for it, the return on the investment comes in the form of using the car not a return of the money you spent on it. A NFL contract is the same it is not a like for like exchange; the team gives the player money as an investment, the return on that comes in the form of production.

Aaron Hernandez is a sunk cost, we made an investment in him, and he is unable to recover because he is unable to provide the team with production.

You're now talking about ROI, which, again, has nothing to do with sunk costs.

Ask yourself this: can Danny Amendola's guaranteed money be recovered? If the answer is no (and it is, barring extraordinary circumstances), then it's a sunk cost. Period. There is no debate to be had here. If you think otherwise, then you are wrong and there is no further discussion to have on the matter.

Read this: http://www.investopedia.com/terms/s/sunkcost.asp

In terms relevant to the Investopedia example, you're claiming that the cost is not sunk until the factory is closed. That's not just wrong; it completely fails to understand the question that's being asked in the first place, let alone answer it. You're answering an entirely separate question that isn't even tangentially relevant to the circumstances at hand.

Sunk costs = any cost that's already been paid out and cannot be recovered. This includes signing bonus, primarily, but also any other guaranteed payments.

Prospective costs = any cost that has not yet been paid out, and which you can avoid paying by electing to terminate the contract. This primarily includes base salary, but also any other nonguaranteed payments such as workout bonuses, future incentives, etc.

Since you're really stuck on this point, I'll reiterate it yet again: a sunk cost is not analogous with a poor ROI. An asset's potential for future returns have no bearing whatsoever on which costs are sunk and which are not. In fact, the entire sunk cost methodology is import precisely because it forces you to evaluate assets based on future returns, without allowing your judgment to be clouded by past events that you cannot change. It's simply money that has been spent and cannot be recovered. Period.

Wilfork is probably the best example of it. For the sake of simplicity, let's pretend that it's not possible to extend Wilfork and push his cap hit out into the future. The choices are to honor the last year of his contract or release him. This makes the decision a relatively simple one, since there are two possible outcomes:

Option A: You keep Wilfork, and pay $~11.6M against the cap for his services
Option B: You cut Wilfork, and pay $~3.6M against the cap for his services.

Now let's say that you look at what you can get on the open market, and decide that Wilfork's expected contribution to the team--including performance, leadership, intangibles, etc.--is worth about ~$6M, ie for $6M, you believe that you can get value on the open market equivalent to what Wilfork can give you.

An irrational actor will frequently say "well, I dunno, I already spent $3.6M on Wilfork, so it would be a waste to just cut him. I might as well keep him and honor his full contract". If that's your thought process, then you suck at being a GM and should be fired. Why? Because if your evaluation holds that you can replace Wilfork's production for $6M, then you're leaving money on the table. You're paying $11.6M, when your own analysis holds that you could cut Wilfork, take the $3.6M hit, pay $6M, and get the exact same production for $9.6M instead of $11.6M.

Similarly--and more relevant to Amendola--if you expect that Wilfork's value to you will be $9M, then cutting him on the basis of "he's not living up to his $11.6M cap hit" would be be the same fallacy taken in the other, equally idiotic direction. Why? Because to replace that production you'd have to cut him, take the $3.6M cap hit, and then spend $9M on top of that, leading to a total hit of $12.6M to get the same value that you could have had for 11.6M by just keeping Wilfork. Again, you suck at being a GM and should be fired.

Now, probably the single most important point to keep in mind here: whether or not you're actually right in evaluating the expected value of a player's performance is beside the point. That's an entirely separate question, and while getting it right is at least as important as getting this one right, it still needs to be answered separately.

They're tangentially related in that one answer is an input to the next question, but they're otherwise unrelated. It's possible to make the wrong decision and get great returns, and it's possible to get poor returns on the right decision, in much the same way that hitting on 20 sometimes works and staying on 12 sometimes works.

In much the same way, sometimes you see that you can get $10M worth of value by finishing a widget factory for $5M. If that's the evaluation, then you made the right call by proceeding, even if some freak pipeline accident makes the factory explode days after completion (or, for a football analogy, even if the player suffer's a career-ending neck injury in training camp). In blackjack terms, you hit on hit on a 12. You made the right call, despite the fact that you ended up busting. Sometimes you just get boned by probability.

Alternately, you may elect to spend $5M finishing a widget factory that will only return $1M in profit per year, on the basis that you've already spent too much to stop now. If the alternative is to spend $5M building an entirely new gadget factory that will yield $3M per year in profit, then you've made the wrong call, period. This will remain the wrong call, even if some unforeseeable event quintuples the price of widgets, so that you're suddenly making $5M per year in profit. This is the business equivalent of hitting on 20 and getting a 1. You made a call that would screw you over 90+% of the time. The fact that it didn't this time makes you lucky, not smart.

In the Pats' case, my view is that they're really good at acting rationally with perspective to sunk vs. prospective costs, and rationally allocating resources based on their evaluation of the future value of their assets. They're considerably less good at making accurate predictions for what those future values will be (but still pretty good, compared to the average team). But again, those are separate issues that must be handled separately.

 

[Brady6]

Since you're really stuck on this point, I'll reiterate it yet again: a sunk cost is not analogous with a poor ROI. An asset's potential for future returns have no bearing whatsoever on which costs are sunk and which are not. In fact, the entire sunk cost methodology is import precisely because it forces you to evaluate assets based on future returns, without allowing your judgment to be clouded by past events that you cannot change. It's simply money that has been spent and cannot be recovered. Period.

Amendola signed a 5-year contract at $28.5 million; the signing bonus was $6M allocated out at $1.2M for 5-years. The total investment is intended to take place over a 5-year period and therefore it is a fixed cost. Since Amendola and no NFL player would repay the initial cost in the form of cash the investment is recovered through services rendered so unless the Patriots determine that they cannot recoup any of their investment in Amendola and decide to release him than he is not a sunk cost.

Right now he is a fixed cost, that the Patriots must determine whether to continue to invest into or to move on, should they choose to move on from him then what has been paid would become a sunk cost.

Money already spent and permanently lost. Sunk costs are past opportunity costs that are partially (as salvage, if any) or totally irretrievable and, therefore, should be considered irrelevant to future decision making. This term is from the oil industry where the decision to abandon or operate an oil well is made on the basis of its expected cash flows and not on how much money was spent in drilling it. Also called embedded cost, prior year cost, stranded cost, or sunk capital.

Read more: What is sunk cost? definition and meaning

 

[BradyFTW!]

Amendola signed a 5-year contract at $28.5 million; the signing bonus was $6M allocated out at $1.2M for 5-years. The total investment is intended to take place over a 5-year period and therefore it is a fixed cost.

This is correct

Since Amendola and no NFL player would repay the initial cost in the form of cash the investment is recovered through services rendered so unless the Patriots determine that they cannot recoup any of their investment in Amendola and decide to release him than he is not a sunk cost.

And that's where you go off the rails

Right now he is a fixed cost, that the Patriots must determine whether to continue to invest into or to move on, should they choose to move on from him then what has been paid would become a sunk cost.

Not only are you wrong, but it's becoming increasingly apparent that you don't even understand what the question is. How well Amendola performs for the Patriots--and whether he performs at all, for that matter: he could never play another down and it wouldn't change this evaluation--has nothing to do with which costs are sunk and which are prospective.

Specifically, you seem to be confusing the dichotomy between fixed vs. variable costs with the dichotomy between sunk vs. prospective costs. There is some relation, I suppose, since fixed costs are generally more likely to be sunk, but that's about it. The difference between fixed costs and variable costs is whether or not the cost scales in accordance with production or is fixed relative to production. The difference between sunk and prospective costs is whether or not they are recoverable. These are two very, very different questions. Yes, it's very common to be in a situation where your fixed costs are all sunk (the factory has been built and the equipment is in place), and all of your prospective costs are variable (everything's been built, now we just need to turn the machines on and deal with labor, utilities, COGS, etc.). That said, there are plenty of circumstances where you'll have sunk variable costs (the labor, utilities, COGS, etc. for goods that have already been produced) and prospective fixed costs (the costs associated with a factory that has not yet been built).

For the record, this means that in an NFL contract, both the signing bonus and the base salary are fixed costs.

Whatever school gave you a BA in economics did a disservice to both you and the world at large by handing you a degree. I would have failed Econ 101 if I'd displayed such a thorough misunderstanding of basic economic principles. In fact, now that I think about it, I'm pretty sure that this was covered in high school economics. (although to be fair, this is more the stuff of microeconomics, so if you specialized in macro, then that makes it slightly less unacceptable)

 

[mgteich]

If Amendola and Edelman were not here, would you sign Amendola to this contract on March 10th? That is the choice before the team. Many think that Amendola is well worth this contract. Some do not.

What the team paid him in 2013 is totally irrelevant.

NEW PLAYER
2014 $2M bonus, $1M salary plus workout and game (up to $500K per year) incentives
2015 $4M plus workout and game incentives
2016 $5M plus workout and game incentives
2017 $6M plus workout and game incentives

 

[SalemPats]

If Amendola and Edelman were not here, would you sign Amendola to this contract on March 10th? That is the choice before the team. Many think that Amendola is well worth this contract. Some do not.

What the team paid him in 2013 is totally irrelevant.

NEW PLAYER
2014 $2M bonus, $1M salary plus workout and game (up to $500K per year) incentives
2015 $4M plus workout and game incentives
2016 $5M plus workout and game incentives
2017 $6M plus workout and game incentives

After his performance this year, we would not sign him. That's very obvious

 

[BradyFTW!]

After his performance this year, we would not sign him. That's very obvious

Nowhere near as obvious as you seem to think. I, for one, would pay him that. Who better are you going to get for that little money/

 

[SalemPats]

Nowhere near as obvious as you seem to think. I, for one, would pay him that. Who better are you going to get for that little money/

I think we can find a 50/500 yard guy for cheap. When you have 0 catches and 0 targets in the AFCG against a bad secondary that says something. Not too mention that pretty much every year you've suffered a serious injury is not someone we want.

 

[Deus Irae]

After his performance this year, we would not sign him. That's very obvious

Saying it's obvious that you wouldn't is just knee jerking without thinking. You'd be getting him for $3m plus incentives this year, and then there would be no guaranteed money going forward.

 

[Brady6]

Not only are you wrong, but it's becoming increasingly apparent that you don't even understand what the question is. How well Amendola performs for the Patriots--and whether he performs at all, for that matter: he could never play another down and it wouldn't change this evaluation--has nothing to do with which costs are sunk and which are prospective.

You can believe I am wrong all you want but I disagree, your theory is that every single bonus paid to a player when signing a contract is a sunk cost. You realize that sunk cost is a negative, it is considered cutting loses and moving on. You read a definition and you think that is actually how investors see it but it is not the case.

If Robert Kraft pays, Amendola a $6M bonus it is an investment in the success of the team, as I said it is not a like for like exchange, Kraft gives money and Amendola provides production. If at the end of the 5-year period Amendola has provided the paid for production than there is not sunk cost, there is only a sunk cost if the Patriots cut him today and absorb the $8M they have already paid to him so far.

Kraft = Money
Amendola = Production

If you buy a stock for $45 and it drops to $35 there is a $10 variance, you have the choice to further invest your time and wait to see if the stock increases or you can choose to sell the stock and no longer invest your time. If you choose to sell it at $35 than you would have $10 in sunk cost, what you are failing to understand about a sunk cost is that it is a result of a decision made by the investor it is not an actuality until the outcome has been determined.

If Kraft cuts Amendola tomorrow, there will be a sunk cost, if he continues to invest the teams time in Amendola then his contract is a negative working capital, you are looking at this from a microeconomic perspective and that does not make sense when looking at unlike exchanges that are based on performance and production.

Specifically, you seem to be confusing the dichotomy between fixed vs. variable costs with the dichotomy between sunk vs. prospective costs. There is some relation, I suppose, since fixed costs are generally more likely to be sunk, but that's about it. The difference between fixed costs and variable costs is whether or not the cost scales in accordance with production or is fixed relative to production. The difference between sunk and prospective costs is whether or not they are recoverable. These are two very, very different questions. Yes, it's very common to be in a situation where your fixed costs are all sunk (the factory has been built and the equipment is in place), and all of your prospective costs are variable (everything's been built, now we just need to turn the machines on and deal with labor, utilities, COGS, etc.). That said, there are plenty of circumstances where you'll have sunk variable costs (the labor, utilities, COGS, etc. for goods that have already been produced) and prospective fixed costs (the costs associated with a factory that has not yet been built).

For the record, this means that in an NFL contract, both the signing bonus and the base salary are fixed costs.

I am not confusing anything; you are reading things you see on the internet and not accounting for the situation, the industry or anything else.

Whatever school gave you a BA in economics did a disservice to both you and the world at large by handing you a degree. I would have failed Econ 101 if I'd displayed such a thorough misunderstanding of basic economic principles. In fact, now that I think about it, I'm pretty sure that this was covered in high school economics. (although to be fair, this is more the stuff of microeconomics, so if you specialized in macro, then that makes it slightly less unacceptable)

I do not work in economics or finance in general, I am a pilot for Delta as I said in my previous post. I studied economics at the Air Force Academy while I was serving my country for 12-years, I never intended to work in the industry it is important to have a B.A. in general to be marketable to commercial airlines in the US.

 

[kennyb]

[/qUOTE=Brady6;3753892]You can believe I am wrong all you want but I disagree, your theory is that every single bonus paid to a player when signing a contract is a sunk cost. You realize that sunk cost is a negative, it is considered cutting loses and moving on. You read a definition and you think that is actually how investors see it but it is not the case.

If Robert Kraft pays, Amendola a $6M bonus it is an investment in the success of the team, as I said it is not a like for like exchange, Kraft gives money and Amendola provides production. If at the end of the 5-year period Amendola has provided the paid for production than there is not sunk cost, there is only a sunk cost if the Patriots cut him today and absorb the $8M they have already paid to him so far.

Kraft = Money
Amendola = Production

If you buy a stock for $45 and it drops to $35 there is a $10 variance, you have the choice to further invest your time and wait to see if the stock increases or you can choose to sell the stock and no longer invest your time. If you choose to sell it at $35 than you would have $10 in sunk cost, what you are failing to understand about a sunk cost is that it is a result of a decision made by the investor it is not an actuality until the outcome has been determined.

If Kraft cuts Amendola tomorrow, there will be a sunk cost, if he continues to invest the teams time in Amendola then his contract is a negative working capital, you are looking at this from a microeconomic perspective and that does not make sense when looking at unlike exchanges that are based on performance and production.



I am not confusing anything; you are reading things you see on the internet and not accounting for the situation, the industry or anything else.



I do not work in economics or finance in general, I am a pilot for Delta as I said in my previous post. I studied economics at the Air Force Academy while I was serving my country for 12-years, I never intended to work in the industry it is important to have a B.A. in general to be marketable to commercial airlines in the US.[/QUOTE]

A sunk cost isn't a negative. In your stock example the 45 is a sunk cost. It's also an investment. The two are not mutually exclusive. The 10 dollars is a realized loss.

A sunk cost is neither good nor bad. It's just a cost that's in the past.

It's weird because you cut and pasted a definition once but I guess you didn't read it.

Look at the example of amendola's future contract from here on out written by mgtech. That is the contract the pats have on him going forward. They have if because they paid an upfront signing bonus as an "Investment" as you put it.

But going forward the contract is as mgtech typed. Pats can take it or leave it. They'll decide based on how good he is compared to future monies that need to be paid. But note the signing bonus....where is it in mgtech's writeup? Why isn't it mentioned? Because it's already been paid. It isn't part of the decision to keep or cut. Only future costs are. The signing bonus is ignored!

 

[kennyb]

If Amendola and Edelman were not here, would you sign Amendola to this contract on March 10th? That is the choice before the team. Many think that Amendola is well worth this contract. Some do not.

What the team paid him in 2013 is totally irrelevant.

NEW PLAYER
2014 $2M bonus, $1M salary plus workout and game (up to $500K per year) incentives
2015 $4M plus workout and game incentives
2016 $5M plus workout and game incentives
2017 $6M plus workout and game incentives

Brady do you agree this is the contract the pats have the choice of keeping or not with regards to amendola?

When deciding to keep or cut the pats will look at these prospective costs.

Does it make any difference going forward what they paid him last year?

 

[BradyFTW!]

You can believe I am wrong all you want but I disagree, your theory is that every single bonus paid to a player when signing a contract is a sunk cost. You realize that sunk cost is a negative, it is considered cutting loses and moving on.

Again, you're objectively wrong.

You read a definition and you think that is actually how investors see it but it is not the case.

Before I left to start my own company, I worked in private equity. I was an investor in the entrepreneurial space (pre-venture capital funding, for anyone who cares for specifics- anywhere from seed capital to pre-series A bridge funding to early A rounds), and a pretty good one. To varying extents, I've worked with investors for my entire adult life, either as a manager, working at startups and answering to investors, or raising capital from investors for startup companies. Prior to this, I didn't make any claim that I knew 'how investors see it', since my background qualifications shouldn't matter. What I'm saying isn't correct because I said it; it's correct because it's the truth, and can be easily verified and sourced. But now that you've brought that up as a point of contention, I'll go ahead and give my qualifications. I have it on pretty much the best possible authority that investors see it exactly as I'm describing.

If Robert Kraft pays, Amendola a $6M bonus it is an investment in the success of the team, as I said it is not a like for like exchange, Kraft gives money and Amendola provides production. If at the end of the 5-year period Amendola has provided the paid for production than there is not sunk cost, there is only a sunk cost if the Patriots cut him today and absorb the $8M they have already paid to him so far.

Kraft = Money
Amendola = Production

If you buy a stock for $45 and it drops to $35 there is a $10 variance, you have the choice to further invest your time and wait to see if the stock increases or you can choose to sell the stock and no longer invest your time.

None of this is relevant.

For your stock example, once you pay $45 per share for a stock, the fact that you paid $45 per share immediately becomes irrelevant to your decisionmaking process moving forward. Why? Because it's a sunk cost. That $45 per share is gone, all that matters is what you can sell it for now (and also any dividends that it may pay, but that just complicates the issue so let's ignore it). To quote Belichick: it is what it is. All that matters moving forward is whether I think that the stock will go up or down. If I'm a fund manager and I thinkthat it's going to make it back to $40, then I suck at my job if I sell it just to 'cut my losses'. That methodology is a great way to get consistently sub-optimal returns, and consistently sub-optimal returns get you fired.

All that matters is:

A) Expected return: how much money do I think I can make by continuing to hold this stock, vs.
B) Opportunity cost: what is expected return on the most appealing alternative investment opportunity?

If B > A, I sell. If A > B, I hold. The fact that I paid $45 per share only matters if I'm too proud to be objective (and if that's the case, then again, I suck at my job and should probably be fired).

If you choose to sell it at $35 than you would have $10 in sunk cost, what you are failing to understand about a sunk cost is that it is a result of a decision made by the investor it is not an actuality until the outcome has been determined.

Cite one source that backs this up as the definition of sunk cost. Literally any source in existence that isn't made up by you.

If Kraft cuts Amendola tomorrow, there will be a sunk cost, if he continues to invest the teams time in Amendola then his contract is a negative working capital, you are looking at this from a microeconomic perspective and that does not make sense when looking at unlike exchanges that are based on performance and production.

Again, you don't understand what sunk cost is.

I am not confusing anything; you are reading things you see on the internet and not accounting for the situation, the industry or anything else.

To reiterate the point above: I've made a career out of decisions like this. I know exactly what I'm seeing and what I'm accounting for, and I'm most definitely not pulling random terms off the internet. This is my career.

I do not work in economics or finance in general, I am a pilot for Delta as I said in my previous post. I studied economics at the Air Force Academy while I was serving my country for 12-years, I never intended to work in the industry it is important to have a B.A. in general to be marketable to commercial airlines in the US.

Stick to your day job.

 

[BradyFTW!]

Brady do you agree this is the contract the pats have the choice of keeping or not with regards to amendola?

When deciding to keep or cut the pats will look at these prospective costs.

Does it make any difference going forward what they paid him last year?

Assuming that those are his contract numbers with his guaranteed payments stripped out, then yeah, that's correct. Didn't double-check the numbers myself, but mgteich is is a good source for this stuff, so I'm confident assuming that he has it right.

Can't say with any certainty that the Pats will look solely at prospective costs moving forward - it's what a rational actor would do, and if any FO embodies being a rational actor, it's New England. Based on that, my guess would be that this is exactly the evaluation that they're making, and that they're going to come down pretty firmly on the side of keeping Amendola and crossing their fingers that he's healthier next season than he was this season.

 

[mgteich]

I agree with the other poster who said that there is some school out there that owes you a refund. You have demonstrated that you do not understand sunk cost or other economic and investment principles. My MBA was from Berkeley in Finance. I was a financial advisor for only a couple of years, but spent a couple of decades in Finance departments. I was taught by the guys who wrote the texts as well as from their guests from the Fed and other places. Other posters have also noted that they worked in Finance and invested real money. We don't mention this because it has particular relevance to football, but only to stop your continuing reliance on your BA with a major in economics.

Let us use your stock example. If I bought a stock at $45 in your IRA and its current market price is $35, then the stock is worth $35, period. The $10 is gone and irrelevant, period. Every day, you in effect make a decision whether to sell that stock (or buy more) at its current price less transaction costs (usually zero in an IRA). The original cost is only important if you are considering tax consequences (usually zero in an IRA).

Successful investors and GM's understand the principle of sunk costs. They understand that we make decisions without regard to past profits or losses.

[/qUOTE=Brady6;3753892]

If you buy a stock for $45 and it drops to $35 there is a $10 variance, you have the choice to further invest your time and wait to see if the stock increases or you can choose to sell the stock and no longer invest your time. If you choose to sell it at $35 than you would have $10 in sunk cost, what you are failing to understand about a sunk cost is that it is a result of a decision made by the investor it is not an actuality until the outcome has been determined.

 

[Brady6]

Again, you're objectively wrong.

Before I left to start my own company, I worked in private equity. I was an investor in the entrepreneurial space (pre-venture capital funding, for anyone who cares for specifics- anywhere from seed capital to pre-series A bridge funding to early A rounds), and a pretty good one. To varying extents, I've worked with investors for my entire adult life, either as a manager, working at startups and answering to investors, or raising capital from investors for startup companies. Prior to this, I didn't make any claim that I knew 'how investors see it', since my background qualifications shouldn't matter. What I'm saying isn't correct because I said it; it's correct because it's the truth, and can be easily verified and sourced. But now that you've brought that up as a point of contention, I'll go ahead and give my qualifications. I have it on pretty much the best possible authority that investors see it exactly as I'm describing.

None of this is relevant.

For your stock example, once you pay $45 per share for a stock, the fact that you paid $45 per share immediately becomes irrelevant to your decisionmaking process moving forward. Why? Because it's a sunk cost. That $45 per share is gone, all that matters is what you can sell it for now (and also any dividends that it may pay, but that just complicates the issue so let's ignore it). To quote Belichick: it is what it is. All that matters moving forward is whether I think that the stock will go up or down. If I'm a fund manager and I thinkthat it's going to make it back to $40, then I suck at my job if I sell it just to 'cut my losses'. That methodology is a great way to get consistently sub-optimal returns, and consistently sub-optimal returns get you fired.

All that matters is:

A) Expected return: how much money do I think I can make by continuing to hold this stock, vs.
B) Opportunity cost: what is expected return on the most appealing alternative investment opportunity?

If B > A, I sell. If A > B, I hold. The fact that I paid $45 per share only matters if I'm too proud to be objective (and if that's the case, then again, I suck at my job and should probably be fired).

Cite one source that backs this up as the definition of sunk cost. Literally any source in existence that isn't made up by you.

Again, you don't understand what sunk cost is.

To reiterate the point above: I've made a career out of decisions like this. I know exactly what I'm seeing and what I'm accounting for, and I'm most definitely not pulling random terms off the internet. This is my career.

Stick to your day job.

All right, my man I will take your word for it, I do not really care enough to go back and forth. I would retain Edelman and Amendola personally and manipulate the cap dollars in order to allow that without it being detrimental to the building of the team. I would not be comfortable moving forward with just Amendola at this point and time and I do not see the financial benefit to move on from Amendola at this time.

 

[mgteich]

That is certainly a reasonable position.

Folks will disagree on what price for Edelman would be detrimental to the team.

I would retain Edelman and Amendola personally and manipulate the cap dollars in order to allow that without it being detrimental to the building of the team.