The Best NFL Draft Strategy, and How Economists Discovered It

Two economists have discovered that the best NFL draft strategy isn't the most obvious.

May 9, 2014 at 8:35AM

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The NFL Draft turns every fan into an armchair expert. Whether it's Johnny Manziel's fate this year or Aaron Rodgers' a decade ago, part of the fun is debating where potential superstars will be taken. But for the front offices tasked with making the difficult decisions, it's life or death -- executives have been, and will continue to be, fired for a bad draft. So how can teams be ahead of the game? Two economists may have an answer.

Taking an empirical look at the NFL draft
Cade Massey, a professor at Pennsylvania's Wharton School, and University of Chicago's Richard Thaler analyzed nearly 15 years of historical draft data. By comparing players' draft positions with their eventual career production, Massey and Thaler found something interesting: top picks are overvalued.

They write, "That treasured first pick in the draft is, according to this analysis, actually the least valuable pick in the first round!" Hence the blue surplus curve in the graph below, which measures the difference between a rookie's performance and his compensation. It's at its highest value at the end of Round 1.  

Screen Shot

Figure III. Massey and Thaler, 2012. Worth noting is that the surplus curve is always positive in the graph above. This indicates the NFL's rookie wage scale allows teams to pay first-year players less than their eventual performance dictates they deserve. *First image (above initial text) via Marianne O'Leary, Flickr.

Expanding on this idea, Massey and Thaler explain: "To be clear, the player taken with the first pick does have the highest expected performance [the green line] ... but he also has the highest salary [the red line], and in terms of performance per dollar, is less valuable than most players taken in the second round." Put simply, teams looking to get the best return on investment are better off with multiple picks in the late first and early second rounds.

How can teams take advantage of this phenomenon?
But that's only part of the story. How can teams take advantage of this phenomenon? By trading down in the draft.

It's a strategy the New England Patriots have used with success throughout history, and something the Denver Broncos also like to do. In 2010, for instance, the Broncos traded down from No. 11 in the first round to No. 22, a move that netted them an extra third-rounder. The team selected wide receivers Demaryius Thomas and Eric Decker with the picks -- both had 1,200-plus yard seasons last year. Perhaps more importantly, though, each were paid significantly less than what their play dictated they deserve. Thomas made $2.5 million last year, and Decker made a mere $1.3 million.

The examples don't stop there. Kansas City Chiefs fans are surely aware of Justin Houston, their Pro Bowl linebacker. He was chosen after the team traded down in 2011. The Houston Texans' standout tackle Duane Brown is another case.

The other advantage of trading down
In terms of financial efficiency, it's clearly a smarter move to trade down in the first round. But there's another advantage to this strategy: diversification. Massey and Thaler write:

Of course not every possible trade will work out well, sometimes the team with the high pick will trade away a star for two duds, but this strategy has a very high hit rate. For 74% of the trades, a team would have acquired more starts by trading down than by using a pick.

On the whole, it's better to turn one pick into two or three, especially if they're in the same round. The economists point out that when positions selected back-to-back are compared retroactively, there's only a 52% chance that the first player is better. "The chance that a player proves to be better than the next best alternative is only slightly better than a coin flip," they write.

Vox's Joseph Stromberg covered this angle wonderfully this week, and his take is worth a read. In highlighting the relationship between trading down and winning, he writes: 

The most straightforward piece of proof for all this analysis is the fact that trading down and amassing more pick value ... correlates with more wins on the field. Massey and Thaler came to this conclusion by looking at the number of wins a team had in any given season between 1997 and 2008, and the total value of all picks they'd made in the previous four years.... They found that one standard deviation in pick value translated to 1.5 more wins per season on the field.

One and a half wins per season is meaningful. Just ask the Miami Dolphins, Pittsburgh Steelers, or Arizona Cardinals -- all missed the playoffs by a single victory in 2013. A handful of teams face a similar fate each year.

The bottom line
To be fair, these conclusions may not hold true in the future. There's no guarantee the Browns will improve after trading multiple times in this year's draft and taking Manziel much later in the first round than many analysts predicted. Changes in the NFL salary cap or rookie wage scale could affect rookie compensation. Likewise, if the majority teams actually begin to follow Massey and Thaler's strategy, the curves could shift.

But for now, the economists provide rare insight into a process that's responsible for millions of dollars in salary distribution each year. And given that in 2013, 17 of the NFL's 32 teams were within $4 million of their nine-figure cap, it makes sense why penny-pinching has worked in the past. Now if only my Dolphins would pay attention to this analysis.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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