The Loser's Curse

The NFL draft is supposed to even things out by giving the best college players to the worst pro teams. Two professors, Cade Massey and Richard H. Thaler, suspect that bidders at the annual draft fall prey to a variety of irrationalities, including the common phenomenon at auctions wherein the top bidder overpays: “The Winner’s Curse.” After all, in any given season over his first five years, a first-round draft pick is almost as likely to not start a single game (8 percent) or fail out of the league (8 percent) as he is to go to the Pro Bowl (9 percent).

What Massey and Thaler found was that, in terms of performance (games started, Pro Bowl selections, etc.) per dollar, the top draft pick is actually the worst choice in the first round. Because the cost of players falls off far more quickly than the average performance in the draft, teams are better off trading down to late in the first or even into the second round, where they can get more players cheaper who, taken together, will contribute more performance.

The figure above is an approximation of how the cost of players (compensation) compares with the value of their performance. By looking at what veteran players earn on the free market (allowing for free agency), Massey and Thaler were able to establish the market price of different levels of performance based on several statistics. They then compared the value of the performance that draftees bring to a team in their first five years with what they are actually paid—Massey and Thaler call the difference a player’s “surplus value”—by draft order, to find out which picks are the best deals. The good news for teams is that the whole draft is a good deal, as the rookie salary caps keep prices artificially low.

Top picks do perform better than lower-round choices, but performance falls much more slowly than compensation. The most value per dollar can be found in the second half of the first round and in the second round, where players have good performances on average but are not as expensive. The payoff peaks at about the forty-third pick (the eleventh pick in the second round of this year’s draft), who brings in a five-year performance worth around $750,000 more than his price. Of those first forty-three selections, the No. 1 pick is actually the worst in cost-benefit terms, since that player eats up so much of the budget. This phenomenon is growing more pronounced over time.

Despite all the effort and number crunching that goes into scouting, teams are still overpaying and giving up valuable lower picks for a chance at the top draftees. The smart thing would be to trade down, seeing as the last pick in the top round actually brings more net benefit to a team.