Charles Fried, a law professor at Harvard, famously argued that a contract is a promise. We at prior probability, however, say that a contract is more like a bet.

Consider the relation between sports contracts in baseball and hitting success. When a team signs a player and pays him x dollars, there is always the risk that a player will not live up to his potential, that the x dollars (or some fraction thereof) will be misspent. (In this regard, Alex Rodriguez of the Yankees and Albert Pujols of the Angels come to mind.) This cool graphic published in today’s Times compares the level of salary (on the x-axis) with the number of hits (on the y-axis) for the ten highest-paid hitters on each Major League team. It shows that the relation between salary and success is not obvious. (It also shows the New York Yankees get the least bang for their buck.)

So, why don’t more teams use performance-based contracts to minimize this risk?