Signaling and Game Theory

Bill Bridges —  July 15, 2008

This post is by regular here Bill Bridges.

This piece talks about why there might be a reason to match the Warrior’s outsized (we think) offer for Ronny. I’ve covered in an another post why from a purely economic theory point of view that the Lakers might not be impacted financially from signing Ronny.

The signing of Ronny also serves as a signaling mechanism to all other teams. In Texas Holdem, if you bet pre-flop but check after the flop, you’ve signaled that your hand is weak to the others (you can of course bluff, but let’s not focus on that for the moment). To signal to the others that your hand is enhanced by the flop (and induce them to fold), you have to bet or increase the bet. Consistent play establishes you as a player not to mess with. When you raise, you want to them to fold. Animals do this with colors and other displays to demonstrate to others “don’t mess with me and waste your time”.

Translated to game theory, you want to utilize a strategy that signals to your rivals to optimize your results whilst expending the least resources. Taking strong action to a rival’s actions forces the rivals to temper their actions in the future.

If other teams judge that you are unlikely to match offers made to restricted or unrestricted free agents, they are more likely to come after your players. This is the state that the Clippers live in. Sterling is judged as a cheap skate. He has previously signaled to his rivals that he is sensitive to price. Hence, rivals are likely to come after his players. Other cheap teams like the Suns suffer as their free agents (Joe Johnson, James Jones etc) are taken from them. Offers to the Clippers and Suns players are unlikely to be matched therefore the GM’s efforts are rewarded and not a waste of time and resources.

On the other hand, a strong signal to the rivals that all offers will be matched will make them less likely to come after your players. After all, if the Lakers match GS’s offer, Golden state will have wasted a week during which other free agents might be getting signed. This strong signal will ultimately result in teams feeling shy about signing Sasha, Farmar, and later, Bynum. Less competition for their own free agents will ultimately result in an overall lower cost of human resources for the Lakers in the long term.

Bill Bridges