Misbehaving: The Making of Behavioral Economics (43 page)

The bottom line on this chart shows the surplus value. The thing to notice is that this curve is sloping upward throughout the first round. What this means is that the early picks are actually worth
less
than the later picks. But remember, the Chart says that early picks are worth a lot more than later picks! Figure 22 shows both curves on the same chart and measured in comparable units, with the vertical axis representing value relative to the first pick, which is given a value of 1.

If this market were efficient, then the two curves would be identical. The draft-pick value curve would be an accurate forecast of the surplus that would accrue to the team from using that pick; i.e., the first pick would have the highest surplus, the second pick the second-highest surplus, etc. That is hardly the case. The trade market curve (and the Chart) says you can trade the first pick for five early second-round picks, but we are finding that
each
of those second-round picks yields more surplus to the team than the first-round pick they are together traded for! In all my years of studying market efficiency, this is the most blatant violation I have ever seen.

We made another interesting discovery about the market for picks. Sometimes teams will trade a pick in this year’s draft for a pick next year. What is the exchange rate for such trades? Even a casual look at the data reveals that a simple rule of thumb is used for such trades: a pick in a given round this year fetches a pick one round earlier the following year. Give up a third-round pick this year and you can get a second-round pick next year. (Detailed analyses confirm that trades closely follow this rule.) This rule of thumb does not sound unreasonable on the surface, but we found that it implies that teams are discounting the future at 136% per year! Talk about being present-biased! You can borrow at better rates from a loan shark. Not surprisingly, smart teams have figured this out and are happy to give up a pick this year to get a higher-round pick the following year.
‡

So our research yielded two simple pieces of advice to teams. First, trade down. Trade away high first-round picks for additional picks later in the draft, especially second-round picks. Second, be a draft-pick banker. Lend picks this year for better picks next year.

Before discussing the significance of our findings, especially the advice to trade down, it is important to rule out a few potential explanations that will occur to many readers, especially those who think like economists.

Can teams make so much money from jersey sales bearing the player’s name that they can still find it profitable to draft a high-profile player, even if he does not become a star? No. The teams share all sales of team jerseys and other official NFL products equally.

Can drafting a high-profile player sell enough tickets to make it worthwhile, even if he does not become a star? No. First of all, most NFL teams have waiting lists to buy season tickets. But more to the point, no one comes to watch a bad player even if he is famous. To thoroughly investigate this possibility, we redid our analysis using only offensive linemen, the largely anonymous behemoths who try to protect the quarterback from mountain-size defensive players who want to tackle him. Although only the most dedicated fans would be able to name many of the players on the offensive line for their favorite team, our analysis looks the same, so “star appeal” cannot be the missing factor that explains the anomaly.

Could the chance of getting a real superstar make the gamble worthwhile? No. We did one simple analysis to show this. The primary implication of our analysis is that teams with early picks should trade down, that is, trade their early pick for multiple later picks. To test the validity of this strategy, we evaluated every two-for-one trade that would be possible using the Chart as a guideline. For example, the Chart indicates that the team with the first pick could trade it for picks seven and eight, four and twelve, two and fifty, and so forth. For each of these potential hypothetical trades, we looked to see how the team did by using two measures of player performance: games started and years elected as an all-star. We found that trading down yielded a large increase in games started with no sacrifice in the number of all-star seasons.

How could the decision-makers in the league get this so wrong? Why didn’t market forces drive the price of draft picks toward the surplus value they provide to the team? The answer provides a good illustration of the
limits to arbitrage
concept that was so important to understanding financial markets. Suppose a team reads and understands our paper, what could they do? If they are a good team that is usually near the top of the standings, there is not much they can do to take advantage of the market inefficiency, aside from being willing to lend this year’s picks for better ones the following year. Since there is no way to sell a high draft pick short, there is no arbitrage opportunity for a smart team, much less for outside investors. The best one can hope to do is to buy a bad team, and at least for a while, improve their drafting strategy by trading down.

B
efore we even had our first draft of this paper, we had some interest from one of the NFL teams, and by now we have now worked informally with three teams (one at a time, of course). The first interaction we had was with Daniel Snyder, the owner of the Washington Redskins. Mr. Snyder had been invited by the entrepreneurship club at the Booth School of Business to give a talk, and one of the organizers asked me to moderate a discussion for the audience. I agreed, knowing I would have some time to talk to Snyder one-on-one during lunch.

Dan Snyder is a self-made man. He dropped out of college to start a company that chartered jets to sell cheap spring break vacation trips to university students. He later went into the direct mail advertising business and had the good fortune or wisdom to sell the company in 2000, at the peak of the market. He used the money from that sale, plus a lot of debt, to buy the Redskins, his favorite team when he was a kid. (Unsurprisingly, many consider the name of the team to be a slur, but Snyder defends keeping it.) He had only been an owner for a brief period when we met.

I told Mr. Snyder about the project with Cade and he immediately said he was going to send “his guys” to see us right away, even though they were in the midst of the season. He said, “We want to be the best at everything.” Apparently when Mr. Snyder wants something he gets it. That Monday I got a call from his chief operating officer, who wanted to talk to Cade and me ASAP. We met Friday of that week with two of his associates and had a mutually beneficial discussion. We gave them the basic lessons of our analysis, and they were able to confirm some institutional details for us.

After the season ended, we had further discussions with Snyder’s staff. By then, we were pretty sure they had mastered our two takeaways: trade down and trade picks this year for better picks next year. Cade and I watched the draft on television that year with special interest that turned into deep disappointment. The team did exactly the
opposite
of what we had suggested! They moved up in the draft, and then traded away a high draft pick next year to get a lesser one this year. When we asked our contacts what happened we got a short answer. “Mr. Snyder wanted to win now.”

This was a good forecast of Snyder‘s future decisions. In 2012 the Redskins had the sixth pick in the draft, meaning they had been the sixth worst team in 2011, and they were desperate for a high-quality quarterback. There were two highly rated quarterbacks available that year, Andrew Luck and Robert Griffen III, who is known as RG3 for short. Indianapolis had the first pick and had announced their intention to take Luck. The Redskins wanted RG3. The second pick belonged to the St. Louis Rams, who already had a young quarterback they liked, so the Redskins made a deal with the Rams. They moved up four spots from the sixth pick to the second one, and in addition to giving up that sixth pick they gave the Rams their first- and second-round picks for the following year, 2013, and their first-round pick in 2014
.
This was an astonishing price to pay to move up just four spots.

How did things work out? In the first year, RG3 did his best to make the trade look smart, and us egghead professors look dumb. He was an effective player who was exciting to watch and the team was winning, making the playoffs, suggesting that the trade might have a chance of working out if RG3 became a superstar. But late in the season he was injured and sat out a game. When he came back to play again, possibly too early, he aggravated the injury and needed surgery. The following year, he did not return to the top form he had showed as a rookie, and the Redskins had a terrible season, so bad that the 2014 first-round pick the Redskins had given the Rams turned out to be the second pick in that draft, so giving up that pick turned out to be very expensive. (Recall that it was a number two pick that the Redskins had originally traded up to get.) The 2014 season was also a disappointing one for RG3. In hindsight, another player named Russell Wilson, who was not picked until the third round, appears to be better and less injury-prone than RG3. During his three years in the NFL, Wilson has led his team to the Super Bowl twice, winning once.

Of course, one should not judge a trade using hindsight, and the Redskins were certainly unlucky that Griffen suffered from injuries. But that is part of the point. When you give up a bunch of top picks to select one player, you are putting all your eggs in his basket, and football players, like eggs, can be fragile.
§

Our relationship with the Redskins did not last very long, but we soon found that another team (whose identity shall remain confidential) was interested in talking to us about draft strategy. In our dealings with that team we learned that there would often be debates among the team’s leadership about draft strategy. Some staff members who were comfortable with analytic thinking bought into our analysis and argued for trading down and lending. Others, such as the owner or one of the coaches, would often fall in love with some player and insist on trading up to get their guy. Furthermore, on the few occasions where the team did trade down in the first round, getting a later first-round pick plus an additional second-round pick, the extra pick would not last long. The extra pick had the feel of “house money” and was usually traded away quickly to grab another “sure thing.”