Why the later rounds of the NFL draft are the ones that matter

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The annual NFL draft kicked off Thursday, with some predictable choices made early, and a few unexpected upsets along the way. Research shows, however, that the rounds on Friday and Saturday are where you find real value.

For highly paid decision makers, the draft means a lot of decisions must be made about short- versus long-term prospects, interest rates and risk-adjusted returns. It’s a lot like the stock market.

In fact, draft choices and investment choices are actually pretty similar: You want to mix high-risk growth with low-risk assets. You need your quarterback and linemen, but do you take a risk on a prospect who looks good on paper, but might have disciplinary problems down the road?

Millions of dollars every year go into scouting operations for teams to find the just-right selection that will complement their existing teams. That money often goes to waste as the teams trade future opportunities for picks this year.

That’s sort of like trying to predict the market in the short term instead of riding it out. Even the most highly paid advisor can make bad moves and end up costing you money.

So why do teams and coaches have so much trouble picking the right players?

A lot has to do with psychology and general hubris on the part of coaches and team decision-makers, research has suggested. In their book Scorecasting, L. Jon Wertheim and Toby Moskowitz point to psychological factors for NFL draft decisions—including people overpaying for things when they feel they’re in competition with others. Just look at how fine art auctions work, or any number of reality TV shows.

It’s like rushing to buy what you think is a hot stock when the company holds an initial public offering, only to have it plummet right after.

Everyone wants the Tom Brady payoff. The Patriots quarterback was drafted in the sixth round in 2000, when the team was worth around $464 million. Now it’s a $3.2 billion empire, and Brady has won four championships and put up stats that all but ensure a space in the Hall of Fame.

The way to find value in the world of football is teams using the draft to pay less for the talent than they would have to on the free agent market. That’s the lesson of “The Loser’s Curse,” a 2005 paper by by behavioral economists Cade Massey and Richard Thaler.

Massey and Thaler’s research focuses on the surplus value afforded to teams who make draft picks, compared to the price they’d have to pay to acquire the same level of talent on the free-agent market. Advanced Football Analytics’ Brian Burke recently used the paper to analyze surplus value in the draft under the NFL’s current collective bargaining agreement (CBA).

The research found that top draft picks were consistently overvalued in terms of pay to performance, compared to picks made later in the draft. Specifically, they found a bump in surplus value came later in the first round and over the next two rounds. (This year rounds two and three were held on Friday night.)

The paper was written while players were under a previous CBA so didn’t take into account for the current starting salaries based on draft pick position. The new CBA smoothed somewhat the sharp curve of salary cap hits for early selections, but not by much.

There’s also the pressure on coaches and managers to find value immediately. Fans and owners want their team to perform well that year, not a year or several down the road. Decision-makers this year may sacrifice a teams’ choices for years to come to take those early first-round picks.

Meanwhile, teams often feel a big incentive to “trade up” in the draft to the first round. And this year’s process has already been shaped by huge trades.

Based on surplus value, the Browns made off like bandits in their recent trade with the Eagles. Cleveland gave up the number 2 slot in this year’s draft, and a fourth-round pick in the 2017 draft for a first-round pick (eighth overall), two later-round picks as well as picks in the 2017 and 2018 drafts. In total, the Browns got around $10.2 million in surplus value from the deal, compared to just $2.2 million going to the Eagles, according to calculations that Burke did at ESPN.

It may well be regarded as one of the most lopsided deals in NFL draft history.

The Rams traded big as well to get to the top of the first round. They took Jared Goff, a quarterback out of the University of California, Berkeley, but those early-round QB picks don’t always go well. JaMarcus Russell and Ryan Leaf were both top-two draft picks who ended up being total busts.

Think about it: Trading away picks two or three years down the road is like taking out a loan, and teams do this all the time. The problem is that the loan is given at an enormous interest rate. Wertheim and Moskowitz cite a rate around 174 percent for teams exchanging future choices for picks today.

Would you take out a loan at 174 percent interest?

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