The Loser's Curse: Decision Making & Market Efficiency in the National Football League Draft
35 Pages Posted: 5 Apr 2005 Last revised: 5 Sep 2012
Date Written: September 4, 2012
Abstract
A question of increasing interest to researchers in a variety of fields is whether the biases found in judgment and decision making research remain present in contexts in which experienced participants face strong economic incentives. 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 monetary stakes are exceedingly high and the opportunities for learning are rich. It is also a domain in which multiple psychological factors suggest teams may overvalue the chance to pick early in the draft. Using archival data on draft-day trades, player performance and compensation, we compare the market value of draft picks with the surplus value to teams provided by the 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: Market efficiency, rational expectations, behavioral decision theory, labor markets
JEL Classification: D21, D40, D84, J31, L83, M51
Suggested Citation: Suggested Citation
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