All opinions are my own and do not necessarily reflect those of Novo Nordisk.
The NFL draft is happening as I am writing this post. And of the many draft-related pieces I’ve read in the past few days, one from Vox.com particularly stood out. The article, by Joseph Stromberg, describes research by Cade Massey and Richard Thaler (here and here) about the skewed and irrational choices often made by teams during trades of draft picks. In essence, teams are likely to pursue a strategy in trading up that suggests they believe they have a much greater ability to forecast the future performance of a given player than is actually the case. Put another way, rather than following a strategy of diversified risk, teams commit to a specific player that they feel they need to get, rather than simply seeing who’s available when they are scheduled to pick and choosing the best player on their draft board.
Historical analysis shows that the difference between various players drafted at the same position is often negligible; on top of that teams who aggressively trade down and gather more picks in the lower rounds generally do better in terms of the value they receive for the money they spend in salaries. One might argue this is an artifact in part of the NFL Rookie salary structure, but even without that, players taken in later rounds will always command smaller salaries. Getting similar value for less money is generally a good thing.
If you’ve read posts from this blog before you know where I’m going. Drafting NFL rookies sounds a lot like developing drugs. Continue reading