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The Loser's Curse: Overconfidence vs. Market Efficiency in the NFL Draft

Lanky Livingston

Very interesting paper, that suggests trading out of the #4 spot is not only a good strategy, but also says the trade value chart isn't accurate (for the first round).

Some interesting quotes:
To determine whether the market values of picks are “correct” we compare them to the surplus value (to the team) of the players chosen with the draft picks. We define surplus value as the player’s performance value – estimated from the labor market for NFL veterans – less his compensation.

Our findings strongly reject the hypothesis of market efficiency. Although the market prices of picks decline very sharply initially (The Chart prices the first pick at three times the 16th pick), we find surplus value of the picks during the first round actually increases throughout most of the round: the player selected with the final pick in the first round on average produces more surplus to his team than the first pick, and costs one fifth the price!

We also show that the strategy implied by our analysis, that is to trade away high picks for lower picks, yields more games started without sacrificing any chance of obtaining a superstar player (as measured by elections to the Pro Bowl all-star game). Finally we show that teams that follow our strategy win more games.

over their first five years, first-round draft picks have more seasons with zero starts (15.3%) than with selections to the Pro Bowl2 (12.8%).

any player called to the podium in the first five picks of the draft has about a 50% chance of being a flop, according to Yale School of Management professor Cade Massey...Mr. Massey looked at the top five picks from 1991 through 2004, 70 players total, to see how many couldn't cut it in the league (didn't play five seasons), which ones were mere disappointments (still in the league after five years but never made a Pro Bowl) and how many actually panned out (named to at least one Pro Bowl).

Here is the full paper, very interesting read, especially if you're into market analysis and such.

Interesting indeed. Here's the visual version of the Cliff Notes:

Green bar = "Chart Value"
Red Dotted line = Ave. salary
Blue Dotted line = Measured performance

Through an incredibly complex statistical analysis, they basically say the end of the first round is the sweet spot in terms of cost/performance ratio, and that teams historically over-value and therefore over-pay for draft picks high in the 1st round due to this fact, as well as the deducted idea that it's all a crap shoot anyway.

In other words, they say do exactly what New England has traditionally done. Stay away from the top of the board and stockpile picks in the 25 - 50 range, and take advantage of the (on average) 1 round markup you'll enjoy by trading for another team's future picks when you can.

Edit: That does not imply in any way the Bill Belichick is a genius.

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