Does the principle of investment diversification apply to the starting pitching staffs of major league baseball teams?

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Author: Paul J. Roebber
Date: Jan. 13, 2021
From: PLoS ONE(Vol. 16, Issue 1)
Publisher: Public Library of Science
Document Type: Report
Length: 4,888 words
Lexile Measure: 1550L

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Abstract :

Financial advisors often emphasize asset diversification as a means of limiting losses from investments that perform unexpectedly poorly over a particular time period. One might expect that this perceived wisdom could apply in another high stakes arena-professional baseball-where player salaries comprise a substantial portion of a team's operational costs, year-to-year player performance is highly variable, and injuries can occur at any time. These attributes are particularly true in the case of the starting pitching staffs of professional baseball teams. Accordingly, this study analyzes starting pitcher performance and financial data from all Major League Baseball teams for the period 1985-2016 to determine whether the standard investment advice is applicable in this context, understanding that the time horizon for success for an investor and a baseball team may be distinct. A multiple logistic regression model of playoff qualification probability, based on realized pitcher performance, measures of luck, and starting pitcher staff salary diversification is used to address this question. A further stratification is conducted to determine whether there are differences in strategy for teams with allocated financial resources that are above or below league average. We find that teams with above average resources increase their post-season qualification probability by focusing their salary funds on a relative few starting pitchers rather than diversifying that investment across the staff. Second, we find that pitcher performance must align with that investment in order for the team to have a high qualification probability. Third, the influence of luck is not negligible, but those teams that allocate more overall funds to their pitching are more resilient to bad luck. Thus, poorly resourced teams, who are generally unable to bid for pitchers at the highest salary levels, must adopt alternative strategies to maintain their competitiveness.

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Gale Document Number: GALE|A648235307