With the First Pick of the NFL Draft... Irrational Economic Behavior

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Earlier this month the NFL held their 2015 Draft in Grant Park, Chicago, about one mile from our West Monroe headquarters. With the first pick, the Tampa Bay Buccaneers selected quarterback and 2013 Heisman Trophy winner Jameis Winston. Immediately thereafter, 2014 Heisman Trophy winner Marcus Mariota was drafted as the second pick to the Tennessee Titans. Winston signed a fully guaranteed 4-year, $25 million deal and Mariota signed a 4-year, $21 million deal.  Whether or not they are worth the money remains to be seen, but one thing is certain…data analysis shows that early NFL draft picks are overvalued and teams generally make economically irrational decisions by drafting them.

To prove this, we looked at draft data, player contracts, and offensive production as proxy measured by number of fantasy football points scored from the season after they were drafted through the 2014 season. Data analyzed was taken from players drafted from 2011 to 2013. Only Quarterbacks, Running Backs, Wide Receivers, and Tight Ends were considered.

As no surprise, first round draft picks, on average, had the highest offensive production…

Avg per player

…and, as we know, first round draft picks receive the highest compensation…

Avg Salary

but are they really worth that much more? In a perfectly efficient market, the compensation would be aligned with the amount of production, or fantasy points scored. In the graph below, this would result in a fairly horizontal line where each unit of value (fantasy point) receives roughly equal compensation. However, we see that the average salary of a first round pick is well over twice that of a second rounder. Are they producing twice as much?

Avg Per Point

The data shows that first round picks are clearly overcompensated for their production and that the highest value picks come in the third round of the draft where teams are paying less than half as much per fantasy point. Clearly, the data shows that NFL teams, customers, and individuals do not always make rational decisions or perceive their experiences logically. This is because NFL general managers, front office personnel and coaches have cognitive biases – especially confirmation bias, anchoring, and groupthink – that predispose them to overvaluing first and especially early first round picks.  Such biases are a key component to a rapidly expanding field of study called behavioral economics, to which much of the most recent May 2015 issue of the “Harvard Business Review” was dedicated.

Classical economics assumes individuals behave rationally, but behavioral economics relaxes the strict economic assumptions and allows for factors such as emotion, cultural influence, and poor judgment. Behavioral economics can not only provide further insight into the irrational behavior of NFL teams, customers, and other individuals; it can also help incentivize profit-maximizing behaviors and enhance long-term value optimization of a firm – be it player value to an NFL team or customer lifetime value to a business.

For more detail about behavioral economics and its effect on individual and customer behavior and experience please see our whitepaper, “Why Behavioral Economics for Customer Experience?: Understanding Behavior and Structuring Choices to Maximize Value of the Customer Experience Ecosystem.” For more information on how you can leverage behavioral economics to improve your customers’ journey, please contact Dave Nash, Director-Customer Experience at dnash@westmonroepartners.com.

For more information on this topic, please contact Ken Goebel.

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