Was it arrogance when the U scheduled home and home with USC? Why would you assume then that Alvarez is being arrogant? They will probably get a payout from the "neutral" site game and a guaranteed national network broadcast for an OOC game. They've personally demonstrated that B1G record is what matters in getting to the CCG and Rose Bowl, so why not take a moon shot in OOC?
How would it have helped Michigan not to play Bama (or ND) in OOC? I don't think they sustained any long term injuries during that game either. They ended up losing their bowl game anyway, so cupcaking their schedule up for a higher bowl probably wouldn't have helped. It also wouldnt have made a difference in getting to the B1G CCG unless you think that skipping Bama would have better prepared them to beat Nebraska. Michigan's problem was they were still a bit young, both in experience and in Hoke's system, and they happened to play the top 3 teams (OSU included) in the country.
Stones can be thrown when the U has paid off its schedule downgrading fees.