Monday, May 07, 2007

Economics and the NFL Draft

Kevin Hasset argues that economists will do a better than sports-writers in assessing the success of teams in the NFL draft:
May 7 (Bloomberg) -- U.S. sportswriters analyzed the National Football League draft during the past week and quickly reached a consensus: The Cleveland Browns were the champs.

The Browns wowed the football establishment by choosing both highly regarded offensive lineman Joe Thomas from the University of Wisconsin and quarterback Brady Quinn from the University of Notre Dame on the first round. Yet while both players may well turn out to be outstanding, the opinionated rankings aren't worth the paper they are printed on.

Why rely on opinion when there is scientific evidence? The best available model of the football draft tells a very different story: It suggests that the Browns' draft was only the 17th best out of 32 teams. The big winner: The Oakland Raiders.

To come to this conclusion, I relied again upon a model developed by economists Richard Thaler of the University of Chicago and Cade Massey of Yale University. A year ago, I used their study to evaluate the NFL draft, and the results were amazingly on target.

On average, the teams that the model indicated had succeeded most in last year's draft won 2.25 more games in the 2006-2007 season than they had in the previous year. And the draft's losers on average lost 3.5 more games than they had the year before.

So if you really want to know which club is going to improve the most next year and which ones will fall back, you should tune out the sports geeks and tune in to the economics of football.
This logic will seem very familiar to those of you who have read Moneyball, by Michael Lewis. A lot of this type of analysis does seem to suggest that there are, to use a phrase from a saying in economics, $100 bills lying on the sidewalk. In other words, people do really have blindspots in some situations, and make less than fully-rational decisions, opening up chances for others to come in profit at their expense.

I've long thought that the implications of this reasoning for the financial markets are interesting. If people also have blindspots when they deal on the financial markets, that would imply that markets are indeed not completely efficient in all cases. That in turn suggests the possibility that there may be publicly available information that could allow one to profit in a systematic way on the financial markets, like the Oakland A's did in Moneyball.

But of course, the question of whether or not the financial markets are efficient is an age-old one, which I'm certainly not going to be able to answer. But it's tantalizing to think about...

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