Working Paper: NBER ID: w11270
Authors: Cade Massey; Richard H. Thaler
Abstract: A question of increasing interest to researchers in a variety of fields is whether the incentives and experience present in many "real world" settings mitigate judgment and decision-making biases. To investigate this question, we analyze the decision making of National Football League teams during their annual player draft. This is a domain in which incentives are exceedingly high and the opportunities for learning rich. It is also a domain in which multiple psychological factors suggest teams may overvalue the "right to choose" in the draft -- non-regressive predictions, overconfidence, the winner's curse and false consensus all suggest a bias in this direction. Using archival data on draft-day trades, player performance and compensation, we compare the market value of draft picks with the historical value of drafted players. We find that top draft picks are overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research.
Keywords: No keywords provided
JEL Codes: FD21; J3; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Overconfidence in predicting player performance (Z22) | Systematic biases in valuation of early draft picks (Z22) |
| Systematic biases in valuation of early draft picks (Z22) | Overvaluation of early draft picks (Z22) |
| Market value of draft picks (D46) | Expected surplus value of players (D46) |
| Surplus value of players selected later in the draft (Z22) | Surplus value of players selected in the first round (Z22) |
| Psychological phenomena (winner's curse, false consensus) (D91) | Overvaluation of early draft picks (Z22) |