Awhile back I spent a bunch of posts (start here if you want to read them) discussing an academic paper by economists Cade Massey and Richard Thaler. One of their findings that I didn't talk much about --- largely because I didn't have any explanation for it myself --- is the high discount rate on future draft picks. From their paper:
A third notable feature of these data is the remarkably high discount rate, which we estimate to be 174% per year.
We suspect that one reason why the discount rate is high is that picks for the following year have additional uncertainty attached to them since the exact value depends on the performance of the team trading away the pick in the following year. Still, this factor alone cannot explain a discount rate of this magnitude. Clearly teams giving up second-round picks next year for a third-round pick this year are displaying highly impatient behavior, but it is not possible to say whether this behavior reflects the preferences of the owners or the employees (general manger and coach) who make the choices (or both).
In other words, your round N pick this year for my round N-1 pick next year (which is the standard rule of thumb) is not a good deal for me unless I place a massive premium on winning now as opposed to winning later. Or, as Massey and Thaler put it, unless I'm highly impatient. This is indeed puzzling, but I think I may have an explanation, and it came to me while sifting through the discussion of the Brady Quinn trade.
Dallas gave up #22, which is worth 780 points according to the pick value chart, while Cleveland gave #36 (worth 540) plus their first round pick in 2008. You can run the numbers with various assumptions, but for the sake of definiteness let's just assume that the Browns' pick will be #8 overall selection next year. The #8 pick, according to the chart, is worth 1400 points. So according to the chart, Cleveland is willing to give up 1400 points next year for a gain of only 240 points this year. Highly impatient indeed.
But wait. Cleveland wasn't giving up 540 points this year and 1400 points next year for "the #22 pick." They were giving up 540 points this year and 1400 points next year for Brady Quinn, which is a very different thing. Cleveland obviously values Quinn more highly than an average #22 pick, which is why they made the trade. They wouldn't have dreamed of making that deal three hours prior.
If Cleveland thinks Quinn is as good as an average #3 or #4 overall pick (roughly 1800 points), an idea which wouldn't have raised too many eyebrows on Saturday morning, then the Browns are not paying any interest at all. They're earning interest!
Even if they didn't value Quinn quite that highly, say they think he's worth a typical #6 or #7 pick (which again would not have seemed remotely controversial a few days ago), then it looks like this: Cleveland immediately acquires a commodity that they think is worth about 1600 points. To do this, they give up 540 points right now, and somewhere around 1400 points next year. There is a discount rate, as there should be, but it's not 174%.
And this is typical. Teams that give up future-year picks are always the teams that are trading up. And teams generally trade up only when they are targeting a particular player, like Quinn, because they value him more highly than they'd value a generic player in that slot.
Let's look at some other trades from Saturday involving future picks:
- The Colts traded their #1 pick in 2008 (let's say 600--700 points), along with pick #126 (worth 46 points), to San Francisco for pick #42, which the Colts used to select Tony Ugoh. If the Colts view Ugoh as being as good as a typical late first round pick, again a not-totally-wacky notion, then there is no discount rate at all.
- Similarly, San Diego moved up to grab Utah safety Eric Weddle at #37, giving up their 2008 third-rounder, among other things, in the process. If you add in the 2008 pick at full value, they gave up 587 points for him, which is about what pick #32 or #33 is worth on the chart. Again, some analysts had Weddle ranked in that general vicinity.
So I think Massey and Thaler were sort of right, or exactly wrong, depending on how you look at it. The apparently-high discount rate comes about not because of uncertainty about next year's pick but because of complete certainty about this year's pick. Cleveland was not overvaluing this year's #22 pick relative to next year's #8 (or whatever) pick. Cleveland, in fact, didn't make a trade for this year's #22 pick. They made a trade for Brady Quinn.
The Browns' front office might indeed be guilty of falling into another of the psychological traps mentioned by Massey and Thaler: overestimating their own ability to judge Brady Quinn as a prospect. But I don't see any reason to believe that they were acting impatiently.
This entry was posted on Monday, April 30th, 2007 at 4:01 am and is filed under NFL Draft. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.