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April 2, 2010
When a First Pick Isn’t the Best Pick
By RICHARD H. THALER
AS March Madness winds down, it’s time to turn our attention to the next major sports event on the calendar. That’s right, the National Football League draft, now a three-day extravaganza with the first round broadcast in prime time on April 22.

Spring is a fitting time for the draft, because hope springs eternal for fans of downtrodden teams. The rules of the draft specify that teams can choose according to their won-lost records from the previous year, with the worst teams choosing first. The idea is to give the bad teams the early picks to help them become winners.

As it turns out, however, the draft does not play the Robin Hood role particularly well. Indeed, I have written a paper, recently revised, on this subject with Cade Massey, a professor at the Yale School of Management. We found that the teams choosing early in the draft generally don’t, in fact, get the players that provide the most value per dollar. Our paper is titled “The Loser’s Curse” because we discovered that the first pick in the draft is, on average, the least valuable in the entire first round.

That surprising result has implications not only for football, but also for any domain where organizations try to select talent, whether C.E.O.’s or their own “rookies” — newly minted graduates.

Our analysis pivots around the idea that while there is an active trading market for N.F.L. draft picks, the market places too high a value on picking early. A team that wants to select a player before its turn can offer another team a deal in order to “trade up.” Over time, teams have come to agree on the price of such trades by resorting to a table now universally known as the Chart, which assigns a value to each pick in the draft. Alas, the Chart has the “wrong” prices.

If the market for draft picks were “efficient,” meaning that the prices reflected intrinsic value, the resulting value for a team that trades up for a higher pick should be equal to the value of the picks it gives up. The price of moving up is steep: to move from the 11th pick to the 5th pick, for example, a team would have to forfeit its second-round pick as well. To be worth it, the player taken just six picks earlier would have to be a whole lot better — because both of the players given up could have become stars, too.

How confident should a team be that this early pick is better? Suppose we rank all the players at a given position — running back, linebacker, etc. — in the order they were picked in the draft, then compare any two in consecutive order on the list. What do you think is the chance that the player picked higher will turn out to be better — as judged, say, by number of games started in his first five years in the league?

If teams knew nothing, the answer would be 50 percent, as it would be for flipping a coin. If they had perfect knowledge, the answer would be 100 percent. Go ahead, make your guess.

The answer is 52 percent — an outcome that is barely better than that of a coin flip. This means that although the value of players declines throughout the draft, quality declines more slowly than compensation — players picked early are very highly paid. As a result, the first pick in the draft has often provided less value to his team, in performance per dollar, than the last pick in the first round (the one awarded to the Super Bowl winner). In other words, in the world of the N.F.L. draft, the rich get richer.

The league has helped to create this problem in the way it pays rookies. A special salary cap applies to rookies and, unlike the overall salary cap the league uses, it varies across teams. The teams with the first picks get more money to spend on signing their draftees. Since agents know how much a team has been allocated to sign the first-round pick, they demand that amount for their player. As a result, compensation for draft picks declines almost in lock step; the first player gets the most, then the second pick, and so on, with the last player taken in the first round getting only 25 percent of the amount awarded to the first pick.

It turns out that the N.F.L. and the players’ union are trying to renegotiate their collective bargaining agreement. One topic reported to be on the bargaining table is shifting some of the pay away from early draft picks.

The owners and players should find common ground on this issue, because it makes absolutely no sense to be giving so much money to unproven rookies, many of whom turn out to be busts. By reducing the premium paid to the highest draft choices, the league could restore the redistributive goal that the draft was created to achieve. And veteran players would probably agree with the principle that eight-figure salaries should be reserved for players who have already proved themselves on the field.

SO if teams’ ability to select players is only slightly better than flipping coins, should we expect that corporations can do any better in picking their chief executives?

After all, it’s probably easier to predict the performance of football players than of C.E.O.’s. Athletes perform the same job in a very public forum for years, and all aspects of their job are subject to wide critical evaluation. They are also given extensive physical and mental tests. (Yes, it is important for a football player to be smart — and several years of college don’t assure that.)

On the other hand, chief executives hired from outside a particular company have been performing mostly in private. And I’ve never heard of a prospective C.E.O. being given an I.Q. test — or having to run the business version of the 40-yard dash (perhaps a press conference?).

So maybe companies shouldn’t pay big bucks in the desperate hope of getting the equivalent of a Peyton Manning, who was the first overall pick in 1998 and, of course, has proved his superstar value. Instead, maybe they should dig around for a replica of Tom Brady, who was the 199th pick in the 2000 draft and has gone on to play in four Super Bowls, winning three.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.

While this is well worn territory, I think it's obviously true. After the first ten picks or so, the draft and compensation makes sense. For those first ten picks, however, it is ridiculous, and does lead to poor teams getting poorer, and utter lack of redistribution in a capped league.

His analogy to CEOs, however, seems lacking. The hiring of them is more equivalent to free agency in football, in which relatively known quantities are paid for, and being 10% better than your peers can be worth 3x the money. That's the scale CEOs are paid on, and rightly so. If a CEO can make a company 5% better (cut costs 5% or grow revenues 5%), then he can double the market value of a company (often a 5% change will double or triple profit margins) and therefore create billions of dollars (for the company). If he's getting paid 20 mil, he's only getting paid a small fraction of created value. This is true, however, only of the best of the best in CEOs, and, unfortunately, they all get paid as if they create that value, much like second tier safeties in FA getting paid as if they're Ed Reed. Performance incentives representing the bulk of value takes care of that for the most part.

Back to anything relevant to this topic, I'd be shocked if they don't put a cap on the 1st rounders. Leave the rest of the draft as is, and make the 1st pick in the draft get paid 50% more than the 32nd, and have it on a gradual decline throughout the round. I don't remember the precise numbers, but basically 2mil/yr for the 32nd player, and 3mil/yr for the 1st player taken, and in between than number for all the other guys, with a 4 mill "congratulations, all your hardwork paid off" signing bonus.

If you were to take what Robiskie (Pick No. 36) and increase it by 3% of each previous pick (so the 35th pick gets 3% more guaranteed money than Robiskie, and so on), then the #1 pick would only be guaranteed around $8.23 million, which I think is a perfectly acceptable number. If the #1 pick was only making no more than $10-12 million guaranteed, I think all parties would be happy.

Here's the numbers for the Top 50 picks (note: I never got info for picks #33-35)

Pick Player Team Pos. Yrs. Total Guaranteed
1. Stafford, Matt - Lions QB 6 yrs. / $72,000,000 ; $41,700,000 guaranteed
2. Smith, Jason - Rams OT 6 yrs. / $61,775,000 ; $33,000,000 guaranteed
3. Jackson, Tyson - Chiefs DE 5 yrs. / $49,000,000 ; $31,000,000 guaranteed
4. Curry, Aaron - Seahawks OLB 6 yrs. / $60,000,000 ; $34,000,000 guaranteed
5. Sanchez, Mark - Jets QB 5 yrs. / $44,500,000 ; $28,000,000 guaranteed
6. Smith, Andre - Bengals OT 6 yrs. / $42,000,000 ; $21,000,000 guaranteed
7. Heyward-Bey, Darrius - Raiders WR 5 yrs. / $38,250,000 ; $23,500,000 guaranteed
8. Monroe, Eugene - Jaguars OT 5 yrs. / $25,000,000 ; $19,020,000 guaranteed
9. Raji, B.J. - Packers DT 5 yrs. / $22,900,000 ; $17,700,000 guaranteed
10. Crabtree, Michael - 49ers WR 6 yrs. / $32,000,000 ; $17,000,000 guaranteed
11. Maybin, Aaron - Bills DE 5 yrs. / $17,600,000 ; $14,200,000 guaranteed
12. Moreno, Knowshon - Broncos RB 5 yrs. / $16,700,000 ; $13,000,000 guaranteed
13. Orakpo, Brian - Redskins OLB 5 yrs. / $15,400,000 ; $12,100,000 guaranteed
14. Jenkins, Malcolm - Saints CB 5 yrs. / $14,500,000 ; $11,000,000 guaranteed
15. Cushing, Brian - Texans OLB 5 yrs. / $14,000,000 ; $10,435,000 guaranteed
16. English, Larry - Chargers OLB 5 yrs. / $13,400,000 ; $9,900,000 guaranteed
17. Freeman, Josh - Buccaneers QB 5 yrs. / $13,500,000 ; $10,245,000 guaranteed
18. Ayers, Robert - Broncos OLB 5 yrs. / $13,000,000 ; $9,700,000 guaranteed
19. Maclin, Jeremy - Eagles WR 5 yrs. / $12,500,000 ; $9,500,000 guaranteed
20. Pettigrew, Brandon - Lions TE 6 yrs. / $12,000,000 ; $9,369,000 guaranteed
21. Mack, Alex - Browns OC 5 yrs. / $11,300,000 ; $8,900,000 guaranteed
22. Harvin, Percy - Vikings WR 5 yrs. / $12,100,000 ; $8,450,000 guaranteed
23. Oher, Michael - Ravens OT 5 yrs. / $10,700,000 ; $7,800,000 guaranteed
24. Jerry, Peria - Falcons DT 5 yrs. / $10,300,000 ; $7,550,000 guaranteed
25. Davis, Vontae - Dolphins CB 5 yrs. / $10,250,000 ; $7,400,000 guaranteed
26. Matthews, Clay - Packers OLB 5 yrs. / $9,925,000 ; $7,105,000 guaranteed
27. Brown, Donald - Colts RB 5 yrs. / $9,600,000 ; $6,845,000 guaranteed
28. Wood, Eric - Bills OG 5 yrs. / $9,300,000 ; $6,575,000 guaranteed
29. Nicks, Hakeem - Giants WR 5 yrs. / $9,200,000 ; $6,500,000 guaranteed
30. Britt, Kenny - Titans WR 5 yrs. / $9,200,000 ; $6,500,000 guaranteed
31. Wells, Chris - Cardinals RB 5 yrs. / $9,000,000 ; $6,345,000 guaranteed
32. Hood, Evander - Steelers DE 5 yrs. / $8,700,000 ; $6,100,000 guaranteed
33. Delmas, Louis - Lions S 4 yrs. /
34. Chung, Patrick - Patriots S 4 yrs. /
35. Laurinaitis, James - Rams ILB 4 yrs. /
36. Robiskie, Brian - Browns WR 4 yrs. / $4,908,000 ; $2,925,750 guaranteed
37. Smith, Alphonso - Broncos CB 4 yrs. / $4,930,000 ; $2,900,000 guaranteed
38. Maualuga, Rey - Bengals OLB 4 yrs. / $4,660,000 ; $2,840,000 guaranteed
39. Britton, Eben - Jaguars OT 4 yrs. / $4,580,000 ; $2,830,000 guaranteed
40. Brace, Ron - Patriots DT 4 yrs. / $3,884,000 ; $2,820,000 guaranteed
41. Butler, Darius - Patriots CB 4 yrs. / $4,325,000 ; $2,735,000 guaranteed
42. Byrd, Jairus - Bills S 4 yrs. / $4,150,000 ; $2,400,000 guaranteed
43. Brown, Everette - Panthers DE 4 yrs. / $4,300,000 ; $2,687,500 guaranteed
44. White, Pat - Dolphins QB 4 yrs. / $4,500,000 ; $2,400,000 guaranteed
45. Sintim, Clint - Giants OLB 4 yrs. / $3,360,000 ;
46. Barwin, Connor - Texans DE 4 yrs. / $4,010,000 ; $2,461,000 guaranteed
47. Mitchell, Mike - Raiders S 4 yrs. / $3,778,000 ; $2,028,000 guaranteed
48. McBath, Darcel - Broncos S 4 yrs. / $3,850,000 ; $2,010,000 guaranteed
49. Unger, Max - Seahawks OC 4 yrs. / $3,700,000 ; $1,950,000 guaranteed
50. Massaquoi, Mohamed - Browns WR 4 yrs. / $3,636,000 ; $1,863,000 guaranteed

Agreed. I would actually increase it by 2% or 1.5% for each one, so the 1st guy is making half again more instead of twice to three times what the last guy in the 1st round is making, but it's all essentially the same thing.

The top guy makes around 8 mil guaranteed and 15 over 5 yrs. The last pick in the first round gets 4 mil guaranteed, and 7 mil for 5 yrs. Anything in that general vicinity should help make the draft do what it was supposed to.

If I was a GM in the currently situation, I'd almost consider trading down out of the first 10 for minimal compensation, since those top ten picks are SO debilitating to a team's payroll situation. And start stacking up 3 or 4 years worth of top 10 picks......just ouch.

Number #2 for your number #15, plus your 3rd rounder? Done. (...as an example..)

It makes sense Yulin, I think one of the problems is that most teams that aren't in the top 10 don't want to trade up into it for the same reason you're trading out of it. Money.

The Jets-Browns trade from a year ago was a bit like you propose. The Browns moved down from #5 to #17 for just a 2nd round pick.

A lot of it depends on who's available. Like for example, this year, I don't think any of the teams picking in the top 7 or so picks should trade down because there are very good players that fill big needs for those players. They could try to move around within those first 7 or 8 picks, but I wouldn't pass up on some of the players at the top of this draft just for the sake of saving money.

It was the same for us when we were picking at #3 in '08. Trading down to #6 or #7 and still getting Ryan made a lot of sense. But missing out on one of the top prospects in that draft for the sake of being cheap would have been a much bigger mistake.