The Loser's Curse and the NFL Draft

In 2005, Cade Massey and Richard Thayer, two academics from Duke and the University of Chicago, authored a fascinating and statistically-heavy paper entitled The Loser's Curse: Overconfidence vs. Market Efficiency in the National Football League Draft.   While the paper is dated, and while it has received its fair share of criticism and analysis itself, I think the most fascinating sentence from the entire 59-page paper is the biggest and most overlooked truth from the modern-day NFL:

Buying expensive players, even if they turn out to be great performers, imposes opportunity costs elsewhere on the roster.

More liberally put, spending too much money on just a few high-priced players is a recipe for losing.  That's because you've lost the "opportunity" to spread those cost across other quality players in other critical areas.    In free agency, this means doing what the Chicago Bears just did with Julius Peppers, or what the Washington Redskins did a year earlier with Albert Haynesworth.  Or what Al Davis does every year with every player. 

In the NFL draft it often means picking in the top of the draft over and over again, which continues to cost you a premium each year.  It also means crazily trading up.  Let's take a look at an example of each.  


A Real Black Hole

The Oakland Raiders have drafted in the top ten in the last four years.   Who they drafted isn't as important as how much they paid for these picks:

Year  Player  Pick #   Total Contract   Years  Guaranteed
2009 Darrius Heyward-Bey 7 $38.25 Million 5 $23.5 Million
2008 Darren McFadden 4 $60.1 Million 6 $26 Million
2007 JaMarcus Russell 1 $68 Million 6 $31.5 Million
2006 Michael Huff 7 $43 Million 6 $16 Million

 

The first thing that stands out from this list (aside from the lack of quality), is the sheer size of the contracts and the massive amounts of guaranteed money.  While the Raiders are picking ahead of the rest of the league, they are paying a large premium to do so.  Imagine what happens to a team after 4 or 5 or 6 years of paying these kinds of premiums if the players don't work out.  The team's problems compound, they end up tying up a lot of their payroll on unproductive players, and the franchise sinks into a bigger hole.   Now you know why they created head coaches.  They need to find someone to distract you from tables like the one above.  

But teams shouldn't end up being in this situation for 4 or 5 years, should they?  After all, given that they have the opportunity to draft the best players, they should end up--after several years--atop the division.  After all, they've drafted all of the "best" players, haven't they?

Unfortunately (or fortunately for teams like the Chargers and Broncos), the NFL draft, and specifically, the first round, is a crapshoot, so much so, I often think it's sheer luck.  But don't take my word for it.  Here is what Massey and Thayer found when they looked at the issue:

...over their first five years, players drafted in the first round spend about as many seasons out of the league (8%) or not starting a single game (8%) as in the Pro Bowl (9%).  page 5

When I read this for the first time, it shocked me.  It also changed my view on the NFL draft.  You see, for all of the tape and combine drills and interviews and private workouts, teams just aren't very good at figuring out who will do well in the NFL.   At least Mel Kiper makes some dough, so it must be good for the economy on some level.

You can begin to see the trouble for a team like the Raiders.  Despite the fact that they are picking ahead of everyone else, their chances of actually finding pro-bowl players for 2 or 3 or 4 years in a row is difficult.  But they still have to pay these picks as if they were pro-bowlers.  And you just thought Big Al was totally crazy.  Turns out he is insane, but insane because he and the other owners haven't figured out how to get a better rookie cap in place.

But what about Peyton Manning or the Dallas Cowboys of the early 1990s?  Didn't they score big in the first round and eventually set themselves up for dynasties?  Sure, you've got me.  But they are the exception to the rule.  And, honestly, given the statistic that I cited above, one could just as easily say they happened to win the lottery.  They got lucky (somewhere there is a parallel universe in which Ryan Leaf is about to enter the Hall of Fame).  

Let's contrast Oakland's data with what the New England Patriots have done in the last 4 years:

Year  Player  Pick #   Total Contract   Years  Guaranteed 
2009 Patrick Chung 34 $ 4 Million (estimates) 4 $2.5 Million (estimates)
2008 Jared Mayo 10 $18.90 Million 5 $13.8 Million
2007 Brandon Meriweather 24 $8.75 Million 5 $6 Million
2006 Laurence Maroney 21 $8.735 Million 5 $6.13 Million

 

The thing that stands out from this list (aside from the quality) is the lack of huge contracts and guaranteed money. The Patriots, aside from happening upon some nice players, have not had the same opportunity costs as the Raiders, and therefore, have been able to spread the money across their roster more evenly.  

But aren't the Raiders just playing the hand they are dealt?  They can't change where they draft each year.  That's true enough.  But they certainly don't have to stay in that position.  They could try and trade back.  Trading back is like great risk management.  If you do it, you are allowing yourself to gain picks, picks that also have a chance to become good NFL players, and you're doing it at less cost and less risk.   As Massey and Thayer point out:

..the right to pick first in the draft, is only a benefit if the team trades it away. The first pick in the draft is the loser's curse (page 32).


The Day the Mastermind Had a Brain Freeze

This can also work the other way.  Teams can sometimes, for whatever reason, fall in love with a player and they foolishly trade away picks, as if they willingly want impose opportunity costs upon themselves.  Unfortunately, we don't have to look too far from home to find an example of this.  The Jarvis Moss trade will suffice.

You all remember this one, don't you?  During the 2007 NFL Draft, Mike Shanahan was sitting at pick number 21. But by pick 17, Jamaal Anderson and Gaines Adams were already off the board.   So Shanahan, thinking he was going after a potential sack artist, moved up from pick 21 to pick 17, and nabbed Moss.

On the surface, this doesn't seem like too big of a deal.  But if we examine what Shanahan gave up to get Moss--essentially to move up 4 spots--the mistake becomes clear.  Denver traded its first-round selection, its third-round selection, and its sixth-round selection (21st, 86th, and 198th overall) to Jacksonville for Moss.  

Let's take a look at the NFL draft value chart and see if Shanahan at least got similar value

17th pick (950 points) = 21st pick (800) + 86th pick (160 points) + 198th picks (13.2 points)

The value chart suggest that Shanahan did not receive fair value.  Under this equation he sits at - 23.2 points.   One might argue that this was a premium that Shanahan had to pay to get a potential 12-to-13-sacks-a-year guy. Perhaps.  But let's take a look at the monetary value of these contracts:

Player  Pick #  Total Contract  Years   Guaranteed 
Jarvis Moss 17 $14.95 Million 5 $8.06 Million
 
Reggie Nelson 21 $9.55 Million 5 $7.1 Million
Marshal Yanda 86 $1.75 million (estimated) 3 $640 K
Doug Datish 198 Undisclosed 4 Undisclosed

 

Interestingly enough, all four of these players are still in the league, but the difference between the bottom 3 is that Moss's contract is probably larger than all of their contracts combined (although Datish's contract was undisclosed).  

It appears that by 2007, Shanahan was done trying to finding the next Terrel Davis.  Instead he was after a big splash, and he was willing to give up two additional picks and more cash for the opportunity to do so.

You might be tempted to say, "well, sure, hindsight is 20/20, but Moss could have become the next Lawrence Taylor."  I suppose this is true, but it's not really the point, now is it?   The point is that generally speaking NFL teams are poor evaluators of talent, the 1st round is a crap shoot anyway, and by stockpiling later picks, you can both manage risk and lessen opportunity costs.   

A McError?

Some have maintained that Josh McDaniels made a similar mistake when he traded this year's 1st-round draft pick to the Seahawks last year for cornerback Alphonso Smith.  I tend to agree with this assessment, regardless of the player chosen.   From a value perspective, McDaniels got the 37th pick in the draft, which had a points value of 530. The pick the Seahawks will end up receiving this year is the 14th pick, which carries a value of 1100.  For those that work with discount rates, I don't have to tell you that the the discount rate on an a one-year investment that has a future value of 1100 and a present value of 530 is extremely high, over 100%.  The thought makes me cringe.

Even if McDaniels had assumed that his team was winning the Super Bowl (which he did not), the value of the last pick in the first round (32nd pick) is 590 points.  That's a discount rate of of about 11.5% over the value of the 37th pick in the 2nd round.  One can talk all day about wanting to get a first round corner for the price of a 2nd.  However, given the lack of success for all teams, a better strategy would have been to exhibit patience, keep this year's number 1 and use it to stockpile additional picks.  

Perhaps, if Brandon Marshall is dealt to the Seahawks for a 1st-round-draft pick, he'll get the opportunity remedy his mistake.  


Draft Strategies

The kind of thinking I've been describing invariably leads itself to these well-known draft strategies:

If you've got a top ten pick, trade back.  Not only will you save your owner a lot of money (than he can later use on actual proven players), you'll be able to add a few additional picks.  

Never, and I mean, never trade up.  If the NFL draft is more lottery than skill, why would you purposely give your opponents more tickets just to get what looks like a luckier series of numbers.

Need should be elevated over best player available.  In a world in which you're just as likely to get it wrong as right, you might as well draft areas of need.  

Going against these three strategies is risky indeed.  You'll tend to reach, you'll tend to overpay, and you'll tend to put all of your eggs into one basket.   If you're Dan Snyder, at least you can afford it.  

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