IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/11270.html
   My bibliography  Save this paper

Overconfidence vs. Market Efficiency in the National Football League

Author

Listed:
  • 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
    Note: AP CF LS
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w11270.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    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. Kagel, John H. & Levin, Dan, 1986. "The Winner's Curse and Public Information in Common Value Auctions," American Economic Review, American Economic Association, vol. 76(5), pages 894-920, December.
    4. Thaler, Richard H, 1988. "Anomalies: The Winner's Curse," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 191-202, Winter.
    5. Michael A. Leeds & Sandra Kowalewski, 2001. "Winner Take All in the NFL," Journal of Sports Economics, , vol. 2(3), pages 244-256, August.
    6. Lawrence M. Kahn, 1992. "The Effects of Race on Professional Football Players' Compensation," ILR Review, Cornell University, ILR School, vol. 45(2), pages 295-310, January.
    7. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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 381-396, 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(01), 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cade Massey & Richard H. Thaler, 2013. "The Loser's Curse: Decision Making and Market Efficiency in the National Football League Draft," Management Science, INFORMS, vol. 59(7), pages 1479-1495, July.
    2. Kräussl, Roman & Mirgorodskaya, Elizaveta, 2016. "The winner's curse on art markets," CFS Working Paper Series 564, Center for Financial Studies (CFS).
    3. Cramton, Peter C, 1995. "Money Out of Thin Air: The Nationwide Narrowband PCS Auction," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(2), pages 267-343, Summer.
    4. Hendricks, Kenneth & Porter, Robert H & Spady, Richard H, 1989. "Random Reservation Prices and Bidding Behavior in OCS Drainage Auctions," Journal of Law and Economics, University of Chicago Press, vol. 32(2), pages 83-106, October.
    5. Theo Offerman, 2002. "Efficiency in Auctions with Private and Common Values: An Experimental Study," American Economic Review, American Economic Association, vol. 92(3), pages 625-643, June.
    6. Tobias Gesche, 2022. "Reference‐price shifts and customer antagonism: Evidence from reviews for online auctions," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 31(3), pages 558-578, August.
    7. 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.
    8. Lawrence Choo & Todd R. Kaplan & Ro’i Zultan, 2019. "Information aggregation in Arrow–Debreu markets: an experiment," Experimental Economics, Springer;Economic Science Association, vol. 22(3), pages 625-652, September.
    9. Vincent P. Crawford & Nagore Iriberri, 2007. "Level-k Auctions: Can a Nonequilibrium Model of Strategic Thinking Explain the Winner's Curse and Overbidding in Private-Value Auctions?," Econometrica, Econometric Society, vol. 75(6), pages 1721-1770, November.
    10. Goeree, Jacob K. & Offerman, Theo, 2003. "Winner's curse without overbidding," European Economic Review, Elsevier, vol. 47(4), pages 625-644, August.
    11. Huai-Long Shi & Zhi-Qiang Jiang & Wei-Xing Zhou, 2015. "Profitability of Contrarian Strategies in the Chinese Stock Market," PLOS ONE, Public Library of Science, vol. 10(9), pages 1-22, September.
    12. Becker, Jan U. & Clement, Michel & Nöth, Markus, 2016. "Start-ups, incumbents, and the effects of takeover competition," Journal of Business Research, Elsevier, vol. 69(12), pages 5925-5933.
    13. Koptyug, Nikita, 2016. "Asymmetric Information in Auctions: Are Resellers Better Appraisers?," Working Paper Series 1110, Research Institute of Industrial Economics.
    14. Drichoutis, Andreas C. & Palma, Marco & Feldman, Paul, 2024. "Incentives and Payment Mechanisms in Preference Elicitation," MPRA Paper 120898, University Library of Munich, Germany.
    15. Lawrence C. Y. Choo, 2014. "Trading Participation Rights to the “Red Hat Puzzle”. An Experiment," Discussion Papers 1408, University of Exeter, Department of Economics.
    16. Elbittar, Alexander, 2009. "Impact of valuation ranking information on bidding in first-price auctions: A laboratory study," Journal of Economic Behavior & Organization, Elsevier, vol. 69(1), pages 75-85, January.
    17. Vincent P. Crawford & Miguel A. Costa-Gomes & Nagore Iriberri, 2010. "Strategic Thinking," Levine's Working Paper Archive 661465000000001148, David K. Levine.
    18. Pagnozzi, Marco & Saral, Krista J., 2019. "Auctions with limited liability through default or resale," Journal of Economic Behavior & Organization, Elsevier, vol. 159(C), pages 51-74.
    19. A. Alexander Elbittar, 2005. "Impact of Valuation Ranking Information on Bidding in First-Price," Microeconomics 0508008, University Library of Munich, Germany.
    20. Ashenfelter, Orley & Genesove, David, 1992. "Testing for Price Anomalies in Real-Estate Auctions," American Economic Review, American Economic Association, vol. 82(2), pages 501-505, May.

    More about this item

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11270. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.