A professor who changed the way people think about the NFL draft has won the Nobel Prize in Economics.
Richard Thaler of the University of Chicago was awarded the prize today for his contributions to behavioral economics. But it’s one particular aspect of his contributions to behavioral economics -- studying how NFL teams behave around the draft -- that is of interest here.
In 2005, Thaler and colleague Cade Massey released a paper titled, “The Loser’s Curse: Overconfidence vs. Market Efficiency in the National Football League Draft.” The paper showed that the highest picks in the draft were overpaid relative to their eventual NFL performance, while second-round picks were bargains relative to their eventual NFL performance. The sweet spot, the economists found, was in the middle of the second round -- that’s where the picks were most likely to be good enough NFL players to justify their contracts.
Several teams’ analytics departments took notice of Thaler’s research. Some began to use Thaler’s thinking and traded down in the first round of the draft, although others that consulted with Thaler couldn’t help themselves and still traded up when they saw a player they loved on the draft board. Thaler once described a meeting with Dan Snyder in which the Washington owner sounded enthused about his staff learning all about Thaler’s research. However, when the draft came, Washington didn’t follow his advice, and when Thaler asked a staffer why, he was told, “Mr. Snyder wanted to win now.”
Thaler’s research began under the old Collective Bargaining Agreement, when the top picks in the draft made enormous salaries. There’s been some talk that Thaler’s research helped put it in NFL teams’ minds that high draft picks were overpaid and led to the new Collective Bargaining Agreement dramatically reducing the contracts of the top picks in the draft. That’s unfortunate for all the Top 10 picks under the new CBA, but helpful to veteran players, as a reduction in the salaries of the top picks leaves more salary cap space available for the rest of the roster.
We’re not sure if the Royal Swedish Academy of Sciences, which awards the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (as the award is formally known), even knows what the NFL draft is. Thaler’s body of work goes far beyond football. But it’s good for those of us who love football to know an economist so renowned has put some serious thought into our corner of the world.