The curse of the No. 1 draft pick
By Tobias J. Moskowitz and L. Jon Wertheim
Excerpted from SCORECASTING: The Hidden Influences Behind How Sports Are Played and Games Are Won, by Tobias J. Moskowitz and L. Jon Wertheim. Copyright 2011 by Tobias J.
"Freakonomics for sports fans," the new book Scorecasting challenges conventional wisdom, uncovers the hidden influences in sports and uses reams of data to investigate questions that tug at every sports fan. Are there really make-up calls in the NBA? Is there, in fact, a home field advantage? Is there really no 'I' in team? In the following excerpt, the authors -- Chicago economist Tobias J. Moskowitz and Sports Illustrated writer L. Jon Wertheim -- consider the value of a top pick.
In 2004 Richard Thaler, a professor of behavioral economics at the University of Chicago, and Cade Massey at Yale were watching the NFL draft. With the first pick, the Chargers chose quarterback Eli Manning, the brother of perhaps the best quarterback in the league, Peyton Manning, and the son of longtime NFL quarterback Archie Manning. The Giants held the number four pick and were in the market for a premier quarterback as well. It was no secret they coveted Manning.
During the 15 minutes the Giants had to make their selection, they were ambushed with two very different options. Option 1 was to make a trade with San Diego in which the Giants would first draft Philip Rivers -- considered the second best quarterback in the draft -- and then swap him for Manning plus give up their third-round pick (number 65) that year as well as their first- and fifth-round picks in the 2005 draft. Option 2 was to trade down with the Cleveland Browns, who held the seventh pick and also wanted a quarterback. At number seven, the Giants probably would draft the consensus third best quarterback in the draft, Ben Roethlisberger.
In exchange for moving down, the Giants would also receive from Cleveland their second round pick (number 37) that year.
The Giants chose the first option, which meant they effectively considered Manning to be worth more than Roethlisberger and four additional players.
To the two economists, however, this seemed like an extraordinarily steep price. But after collecting data from the NFL draft over the previous 13 years and looking at trades made on draft day as well as the compensation -- salaries plus bonuses -- paid to top picks, they found that the Manning trade was anything but unusual. As a matter of routine, if not rule, teams paid huge prices in terms of current and future picks to move up in the draft. They also paid dearly for contracts with those players.
Not only did Manning cost the Giants four other players -- one of whom turned out to be All Pro linebacker Shawne Merriman -- but he was also given a six-year, $54-million contract. Compare this to Roethlisberger's compensation. Ultimately drafted 11th by the Steelers, he received $22.26 million over six years.
Thaler and Massey found that historically, the number one pick in the draft is paid about 80% -- 80%! -- more than the 11th pick on the initial contract. The economists also found that the inflated values teams were assigning to high picks were remarkably, if not unbelievably, consistent. No matter the circumstances or a team's needs, teams routinely assigned the same value to the same pick.
Thaler and Massey compared the values teams placed on picks -- either in terms of the picks and players they gave up or in terms of compensation -- with the actual performance of the players. They then compared those numbers with the performance of the players given up to get those picks. For example, in the case of Manning, how did his performance over the next five years compare with that of Rivers plus the performances of the players chosen with the picks the Giants gave San Diego? Likewise, how did those numbers stack up against Ben Roethlisberger's stats and those of the players the Giants could have had with the additional picks they would have received from Cleveland?
The economists looked at each player's probability of making the roster, his number of starts, and his likelihood of making the Pro Bowl. They found that higher picks were better than lower picks on average and that first rounders on average post better numbers than second rounders, who in turn post better stats than third-round draft picks, and so on.
The problem was that they weren't that much better. Even looking position by position, the top draft picks are overvalued. How much better is the first quarterback or receiver taken than the second or third quarterback or receiver? Not much. The researchers concluded the following:
• The probability that the first player drafted at a given position is better than the second player drafted at the same position is only 53%, that is, slightly better than a tie.
• The probability that the first player drafted at a position is better than the third player drafted at the same position is only 55%.
• The probability that the first player drafted at a position is better than the fourth player drafted at the same position is only 56%.
In other words, selecting the consensus top player at a specific position versus the consensus fourth best player at that position increases performance, measured by the number of starts, by only 6%. And even this is understating the case, since the number one pick is afforded more chances/more starts simply because the team has invested so much money in him. Yet teams will end up paying, in terms of both players and dollars, as much as four or five times more to get that first player relative to the fourth player. Was Manning really 50% better than Rivers and twice as good as Roethlisberger?
You'd be hard put to convince anyone that Manning is appreciably more valuable than Rivers or Roethlisberger; in any event, he's certainly not twice as valuable.
Yet this pattern persists year after year. Is having the top pick in the NFL draft such a stroke of good fortune? It's essentially a coin flip, but not in the traditional sense. Heads, you win a dime; tails, you lose a quarter. Massey and Thaler go so far as to contend that once you factor in salary, the first pick in the entire draft is worth less than the first pick in the second round.
Thaler and Massey discovered another form of overvaluation as well: Teams paid huge prices in terms of future draft picks to move up in the draft. For example, getting a first-round pick this year would cost teams two first-round picks the next year or in subsequent years. Gaining an additional second-round pick this year meant giving up the first- and second-round picks next year. Coaches and GMs seemed to put far less value on the future. Looking at all such trades, the so-called implicit discount rate for the future was 174%, meaning that teams valued picking today at nearly three times the value of taking the same pick in the next year's draft! Think of this as an interest rate. How many of us would borrow money at an annual interest rate of 174%? Even loan sharks don't come close to this rate.
Why do NFL teams place so much value on high picks? We tend to overpay for an object or a service when its value is uncertain and we're in competition with other bidders. There's even a term for this: winner's curse. To demonstrate the winner's curse, a certain economics professor has been known to stuff a wad of cash into an envelope, stating to his students that there is less than $100 inside. The students bid for its contents; without fail, the winning bid far exceeds the actual contents -- sometimes even exceeding $100! (The surplus is used to buy the rest of the students pizza on the last day of class.) The top pick in the NFL draft, by its very nature an exercise in speculation, is singularly ripe for the winner's curse.
Here's another factor in the overpayment of draft picks: As a rule, people are overly confident in their abilities. In a well-known study, people were asked at random whether they were above-average drivers. Three-quarters said they were. Similarly, between 75% and 95% of money managers, entrepreneurs and teachers thought they were above average at their job. How many times are hiring decisions made because a boss is convinced that in a 30-minute interview she's found the best candidate? She's just sure she's right. In the same way, general managers (and sometimes interfering owners) tend to overestimate their ability to assess talent. They trust their guts too much and overpay as a result.
Overvaluing because of gut instincts also helps explain why teams invest so much in this year's pick and so little in next year's prospects. The guy in front of you is a once-in-a-lifetime player, a term invoked at almost every draft. The guy next year is just an abstraction. (Another explanation for the immediacy: GMs and coaches typically have short tenures, so winning now is imperative. Even a year can seem beyond their horizon.)