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Overconfidence vs. Market Efficiency in the National Football League

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  • Cade Massey
  • Richard 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.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11270.

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Date of creation: Apr 2005
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Handle: RePEc:nbr:nberwo:11270

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  1. Camerer, Colin F. & Weber, Roberto A., 1999. "The econometrics and behavioral economics of escalation of commitment: a re-examination of Staw and Hoang's NBA data," Journal of Economic Behavior & Organization, Elsevier, vol. 39(1), pages 59-82, May.
  2. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  3. John H. Kagel & Colin M. Campbell & Dan Levin, 1999. "The Winner's Curse and Public Information in Common Value Auctions: Reply," American Economic Review, American Economic Association, vol. 89(1), pages 325-334, March.
  4. Michael A. Leeds & Sandra Kowalewski, 2001. "Winner Take All in the NFL," Journal of Sports Economics, , vol. 2(3), pages 244-256, August.
  5. Lawrence M. Kahn, 1992. "The effects of race on professional football players' compensation," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 45(2), pages 295-310, January.
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Cited by:
  1. Ohn, Jonathan K. & Bealing, William & Waeger, Dan, 2012. "The Determinants of Annual Earnings for PGA Players Under the New PGA’s FedEx Cup System," Review of Applied Economics, Review of Applied Economics, vol. 8(1).
  2. David Berri & Rob Simmons, 2011. "Catching a draft: on the process of selecting quarterbacks in the National Football League amateur draft," Journal of Productivity Analysis, Springer, vol. 35(1), pages 37-49, February.
  3. Boulier, Bryan L. & Stekler, H.O. & Coburn, Jason & Rankins, Timothy, 2010. "Evaluating National Football League draft choices: The passing game," International Journal of Forecasting, Elsevier, vol. 26(3), pages 589-605, July.
  4. Jonathan Meer & Edward Van Wesep, 2007. "A Test of Confidence Enhanced Performance: Evidence from US College Debaters," Discussion Papers 06-042, Stanford Institute for Economic Policy Research.

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