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VI. CONCLUSION
Psychologists who study decision making are sometimes criticized for devising what are said to
be artificial, contrived, laboratory experiments in which subjects are somehow tricked into making a
mistake. In the “real worldâ€ÂÂ, the critics allege, people learn over time to do pretty well. Furthermore, the
critics add, people specialize, so many difficult decisions are taken by those whose aptitude, training, and
experience make them likely to avoid the mistakes that are so prevalent in the lab. This criticism is
35
misguided on many counts. For example, we all have to decide whether to marry, choose careers, and
save for retirement, whether or not we are expertsâ€â€Âwhatever that might meanâ€â€Âin the relevant domain.
More germane to the topic of this paper, even professionals who are highly skilled and knowledgeable in
their area of expertise are not necessarily experts at making good judgments and decisions. Numerous
studies find, for example, that physicians, among the most educated professionals in our society, make
diagnoses that display overconfidence and violate Bayes’ rule (cf. Christensen-Szalanski & Bushyhead,
1981; Eddy, 1982). The point, of course, is that physicians are experts at medicine, not necessarily
probabilistic reasoning. And it should not be surprising that when faced with difficult problems, such as
inferring the probability that a patient has cancer from a given test, physicians will be prone to the same
types of errors that subjects display in the laboratory. Such findings reveal only that physicians are
human.
Our modest claim in this paper is that the owners and managers of National Football League
teams are also human, and that market forces have not been strong enough to overcome these human
failings. The task of picking players, as we have described here, is an extremely difficult one, much more
difficult than the tasks psychologists typically pose to their subjects. Teams must first make predictions
about the future performance of (frequently) immature young men. Then they must make judgments
about their own abilities: how much confidence should the team have in its forecasting skills? As we
detailed in section 2, human nature conspires to make it extremely difficult to avoid overconfidence in
this task. The more information teams acquire about players, the more overconfident they will feel about
their ability to make fine distinctions. And, though it would seem that there are good opportunities for
teams to learn, true learning would require the type of systematic data collection and analysis effort that
we have undertaken here. Organizations rarely have the inclination to indulge in such time-intensive
analysis. In the absence of systematic data collection, learning will be inhibited by bad memories and
hindsight bias.
We began this study with the strong intuition that teams were putting too high a value on
choosing early in the draft. We thought it crazy for the Giants to give up so many picks for the
36
opportunity to move up from the fourth pick to the first one (regardless of which player they chose). But
we concede that we did not expect the findings to be as strong as those we report. Rather than a treasure,
the right to pick first appears to be a curse. If picks are valued by the surplus they produce, then the first
pick in the first round is the worst pick in the round, not the best! In paying a steep price to trade up,
teams seem to be getting the sign wrong! We have done numerous “reality checks†to see whether these
surprising conclusions are robust, and every analysis gives qualitatively similar results. So, suppose our
analyses are taken at face value. Can they be right? This is a big market, after all, with franchises worth
perhaps $1 billion or more.
We think that while our results are surprising, they are plausible. TANK We suspect that some teams
have not fully come to grips with the implications of the salary cap, a relatively new innovation. Buying
expensive players, even if they turn out to be great performers, imposes opportunity costs elsewhere on
the roster. Spending $10 million on a star quarterback instead of $5 million on a journeyman implies
having $5 million less to spend on offensive linemen to block or linebackers to tackle. Some of the
successful franchises seem to understand these concepts, most notably the New England Patriots, [/b]but
others do not. Whether because they are smart about these ideas or others, the Patriots have been doing
well recently, and so have not had high draft picks to use. We can only speculate about whether they
would trade down if they somehow ended up with one of the earliest and most overvalued picks. But
notice that if a few teams do learn and have winning records, there is no market action they can take to
make the implied value of draft picks rational. Indeed, the irony of our results is that the supposed benefit
bestowed on the worst team in the league, the right to pick first in the draft, is really not a benefit at all,
unless the team trades it away.17 The first pick in the draft is the loser’s curse.
The loser’s curse can persist even in competitive markets for a reason similar to why the winner’s
curse can persist: there are limits to arbitrage. If naïve oil companies bid too much for drilling rights,
then sophisticated competitors can only sit on the sidelines and hope their competitors go broke – or
17 We do note that the San Diego Chargers, the team that took Ryan Leaf with the second pick only to have him flop,
has now traded the number one pick twice. This year they are headed to the playoffs. Lesson learned?
37
eventually learn. Since there is no way to sell the oil leases short, the smart money cannot actively drive
the prices down. Similarly, since there is no way to sell the first draft pick short, there is no way for any
team other than the one that owns the pick to exploit the teams that put too high a value on it Finally,
now that the draft-pick value curve is widely used and accepted in the NFL a team that owns a top draft
pick and would like to trade it may be reluctant to make a trade at less than “full valueâ€ÂÂ. So, even trading
down will be hard unless there is a buyer willing to pay the inflated but conventional price.
The implications of this study extend beyond the gridiron. Football players are surely not the
only employees whose future performance is difficult to predict. In fact, football teams almost certainly
are in a better position to predict performance than most employers choosing workers. Teams get to
watch their job candidates perform a very similar task at the college level and then get to administer
additional tests on highly diagnostic traits such as strength and speed. Finally, once hired, performance
can and is graded, with every action visible on film from multiple angles! Compare that to a company
looking to hire a new CEO (or an investment bank hiring an analyst, a law firm hiring an associate, etc.).
Candidates from outside the firm will have been performing much of their job out of view. Outside
observers see only a portion of the choices made, and options not taken are rarely visible externally. And,
even once a CEO is hired, the company’s board of directors is unlikely to be able measure his or her
performance nearly as accurately as a team can evaluate its quarterback. In our judgment, there is little
reason to think that the market for CEOs is more efficient than the market for football players. Perhaps
innovative boards of directors should start looking for the next Tom Brady as CEO rather than Eli
Manning.
VI. CONCLUSION
Psychologists who study decision making are sometimes criticized for devising what are said to
be artificial, contrived, laboratory experiments in which subjects are somehow tricked into making a
mistake. In the “real worldâ€ÂÂ, the critics allege, people learn over time to do pretty well. Furthermore, the
critics add, people specialize, so many difficult decisions are taken by those whose aptitude, training, and
experience make them likely to avoid the mistakes that are so prevalent in the lab. This criticism is
35
misguided on many counts. For example, we all have to decide whether to marry, choose careers, and
save for retirement, whether or not we are expertsâ€â€Âwhatever that might meanâ€â€Âin the relevant domain.
More germane to the topic of this paper, even professionals who are highly skilled and knowledgeable in
their area of expertise are not necessarily experts at making good judgments and decisions. Numerous
studies find, for example, that physicians, among the most educated professionals in our society, make
diagnoses that display overconfidence and violate Bayes’ rule (cf. Christensen-Szalanski & Bushyhead,
1981; Eddy, 1982). The point, of course, is that physicians are experts at medicine, not necessarily
probabilistic reasoning. And it should not be surprising that when faced with difficult problems, such as
inferring the probability that a patient has cancer from a given test, physicians will be prone to the same
types of errors that subjects display in the laboratory. Such findings reveal only that physicians are
human.
Our modest claim in this paper is that the owners and managers of National Football League
teams are also human, and that market forces have not been strong enough to overcome these human
failings. The task of picking players, as we have described here, is an extremely difficult one, much more
difficult than the tasks psychologists typically pose to their subjects. Teams must first make predictions
about the future performance of (frequently) immature young men. Then they must make judgments
about their own abilities: how much confidence should the team have in its forecasting skills? As we
detailed in section 2, human nature conspires to make it extremely difficult to avoid overconfidence in
this task. The more information teams acquire about players, the more overconfident they will feel about
their ability to make fine distinctions. And, though it would seem that there are good opportunities for
teams to learn, true learning would require the type of systematic data collection and analysis effort that
we have undertaken here. Organizations rarely have the inclination to indulge in such time-intensive
analysis. In the absence of systematic data collection, learning will be inhibited by bad memories and
hindsight bias.
We began this study with the strong intuition that teams were putting too high a value on
choosing early in the draft. We thought it crazy for the Giants to give up so many picks for the
36
opportunity to move up from the fourth pick to the first one (regardless of which player they chose). But
we concede that we did not expect the findings to be as strong as those we report. Rather than a treasure,
the right to pick first appears to be a curse. If picks are valued by the surplus they produce, then the first
pick in the first round is the worst pick in the round, not the best! In paying a steep price to trade up,
teams seem to be getting the sign wrong! We have done numerous “reality checks†to see whether these
surprising conclusions are robust, and every analysis gives qualitatively similar results. So, suppose our
analyses are taken at face value. Can they be right? This is a big market, after all, with franchises worth
perhaps $1 billion or more.
We think that while our results are surprising, they are plausible. TANK We suspect that some teams
have not fully come to grips with the implications of the salary cap, a relatively new innovation. Buying
expensive players, even if they turn out to be great performers, imposes opportunity costs elsewhere on
the roster. Spending $10 million on a star quarterback instead of $5 million on a journeyman implies
having $5 million less to spend on offensive linemen to block or linebackers to tackle. Some of the
successful franchises seem to understand these concepts, most notably the New England Patriots, [/b]but
others do not. Whether because they are smart about these ideas or others, the Patriots have been doing
well recently, and so have not had high draft picks to use. We can only speculate about whether they
would trade down if they somehow ended up with one of the earliest and most overvalued picks. But
notice that if a few teams do learn and have winning records, there is no market action they can take to
make the implied value of draft picks rational. Indeed, the irony of our results is that the supposed benefit
bestowed on the worst team in the league, the right to pick first in the draft, is really not a benefit at all,
unless the team trades it away.17 The first pick in the draft is the loser’s curse.
The loser’s curse can persist even in competitive markets for a reason similar to why the winner’s
curse can persist: there are limits to arbitrage. If naïve oil companies bid too much for drilling rights,
then sophisticated competitors can only sit on the sidelines and hope their competitors go broke – or
17 We do note that the San Diego Chargers, the team that took Ryan Leaf with the second pick only to have him flop,
has now traded the number one pick twice. This year they are headed to the playoffs. Lesson learned?
37
eventually learn. Since there is no way to sell the oil leases short, the smart money cannot actively drive
the prices down. Similarly, since there is no way to sell the first draft pick short, there is no way for any
team other than the one that owns the pick to exploit the teams that put too high a value on it Finally,
now that the draft-pick value curve is widely used and accepted in the NFL a team that owns a top draft
pick and would like to trade it may be reluctant to make a trade at less than “full valueâ€ÂÂ. So, even trading
down will be hard unless there is a buyer willing to pay the inflated but conventional price.
The implications of this study extend beyond the gridiron. Football players are surely not the
only employees whose future performance is difficult to predict. In fact, football teams almost certainly
are in a better position to predict performance than most employers choosing workers. Teams get to
watch their job candidates perform a very similar task at the college level and then get to administer
additional tests on highly diagnostic traits such as strength and speed. Finally, once hired, performance
can and is graded, with every action visible on film from multiple angles! Compare that to a company
looking to hire a new CEO (or an investment bank hiring an analyst, a law firm hiring an associate, etc.).
Candidates from outside the firm will have been performing much of their job out of view. Outside
observers see only a portion of the choices made, and options not taken are rarely visible externally. And,
even once a CEO is hired, the company’s board of directors is unlikely to be able measure his or her
performance nearly as accurately as a team can evaluate its quarterback. In our judgment, there is little
reason to think that the market for CEOs is more efficient than the market for football players. Perhaps
innovative boards of directors should start looking for the next Tom Brady as CEO rather than Eli
Manning.
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