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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.

Suggested Citation

  • Cade Massey & Richard Thaler, 2005. "Overconfidence vs. Market Efficiency in the National Football League," NBER Working Papers 11270, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11270
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    References listed on IDEAS

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    Cited by:

    1. Jeff Borland & Mark Chicu & Robert D. Macdonald, 2009. "Do Teams Always Lose to Win? Performance Incentives and the Player Draft in the Australian Football League," Journal of Sports Economics, , vol. 10(5), pages 451-484, October.
    2. Kevin G. Quinn & Melissa Geier & Anne Berkovitz, 2007. "Passing on Success? Productivity Outcomes for Quarterbacks Chosen in the 1999-2004 National Football League Player Entry Drafts," IASE Conference Papers 0711, International Association of Sports Economists.
    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. 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.
    5. Borghesi, Richard, 2008. "Allocation of scarce resources: Insight from the NFL salary cap," Journal of Economics and Business, Elsevier, vol. 60(6), pages 536-550.
    6. Daniel Weimar & Pamela Wicker, 2017. "Moneyball Revisited," Journal of Sports Economics, , vol. 18(2), pages 140-161, February.
    7. 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.
    8. David J. Berri & Stacey L. Brook, 2010. "On the Evaluation of the ‘‘Most Important’’ Position in Professional Sports," Journal of Sports Economics, , vol. 11(2), pages 157-171, April.
    9. Kendall Weir & Stephen Wu, 2014. "Criminal Records and the Labor Market for Professional Athletes," Journal of Sports Economics, , vol. 15(6), pages 617-635, December.
    10. Mulholland Jason & Jensen Shane T., 2014. "Predicting the draft and career success of tight ends in the National Football League," Journal of Quantitative Analysis in Sports, De Gruyter, vol. 10(4), pages 1-16, December.
    11. Assia Kamoune & Nafii Ibenrissoul, 2022. "Traditional versus Behavioral Finance Theory [La théorie de la finance traditionnelle contre la théorie de la finance comportementale]," Post-Print hal-03634756, HAL.
    12. 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, Lincoln University, Department of Financial and Business Systems, vol. 8(1), pages 1-11, May.
    13. Borland, Jeff & Lee, Leng & Macdonald, Robert D., 2011. "Escalation effects and the player draft in the AFL," Labour Economics, Elsevier, vol. 18(3), pages 371-380, June.

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    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • G1 - Financial Economics - - General Financial Markets

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