Episode #477: Richard Thaler & Cade Massey on the NFL Draft, Misbehaving GM’s, & Exploiting Inefficiencies

Episode #477: Richard Thaler & Cade Massey on the NFL Draft, Misbehaving GM’s, & Exploiting Inefficiencies

 

Guest: Richard Thaler is the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School. Thaler is the 2017 recipient of the Nobel Memorial Prize in Economic Sciences for his contributions to behavioral economics. Thaler studies behavioral economics and finance as well as the psychology of decision-making, which lies in the gap between economics and psychology.

Cade Massey is a Practice Professor in the Wharton School’s Operations, Information and Decisions Department.  Massey’s research focuses on judgment under uncertainty – how, and how well, people predict what will happen in the future.

Date Recorded: 4/5/2023     |     Run-Time: 1:01:46

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Summary: Thaler & Massey share the findings from their paper published years ago – NFL teams overvalue the top picks, shouldn’t trade up, and even after all the scouting teams do, their ability to pick the best player at any pick is about the same as flipping a coin. We talk about why the Bears won the trade against the Panthers this year, what they think about Mr. Irrelevant Brock Purdy’s success last year, and the future of data analytics in sports.

As we wind down, we dive into why this inefficiency still exists after they published a paper almost 20 years ago and how teams battle some of the same issues asset managers face – career risk, impatient stakeholders, and model aversion.

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Links from the Episode:

• 0:39 – Sponsor: YChart’s latest Resource Deck, “Supercharged YCharts Visuals“
• 1:19 – Intro
• 2:18 – Welcome to our guests, Richard Thaler & Cade Massey
• 3:58 – The thesis of their 10 year old paper
• 5:25 – Discovering the “Better Than the Next Guy” stat
• 10:20 – Their take on the Panthers & Bears trade of the #1 pick
• 12:34 – NFL teams that have embraced analytics
• 20:26 – How much human analytics and traditional inputs still play a role in player decision making
• 36:46 – Why we don’t have AI or algorithms making decisions for managers or owners
• 54:00 – What do the professors disagree about?
• 57:08 – Who they thought would win The Masters
• 58:51 – Enjoy this episode? Check out Episode #448: Annie Duke – Why Great Investors Are Great Quitters

 

Transcript:

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Today’s episode is sponsored by my friends at YCharts. I want to tell you about their latest resource deck called Supercharge YCharts visuals. It has a ton of useful slides and visuals that you can use for yourself with blog posts or social media or for meetings with your clients to serve as a value add to conversations and you can customize any of them too. This allows you to pull things like asset class performance by year, the cyclicality of growth versus value, various withdrawal scenarios, and a lot more enough for me. YCharts is letting our listeners access this for free, so you can click the link in the show notes to see it for yourself.

Meb:

Welcome my friends, we got such a fun episode. To prepare you for the NFL draft next week, Nobel Lo Richard Thaler is back with Wharton’s Cade Massey to talk about their old paper on the NFL draft that even the goat Bill Belichick has read. The guys share what they learned years ago, namely that NFL teams overvalue the top picks. They shouldn’t trade up it even after all the scouting teams do. Their ability to pick the best player any pick is about the same as flipping a coin.

We talk about why the Bears won the trade against the Panthers this year, what they think about Mr. Irrelevant Brock Purdy’s success last year and the future of data analytics in sports. As we wind down, we dive into why this inefficiencies still exists after they publish a paper almost 20 years ago and how teams battle some of the same issues asset managers face, like career risk, inpatient stakeholders and model aversion. Please enjoy this episode with Richard Thaler and Cade Massey. Professors, welcome to the show.

Professor Massey:

Good to be here.

Thank you. Glad to be here.

Meb:

Professors Thaler’s been here before. This is a first arcade, although he’s an active podcast host of the Moneyball podcast, which I’ve been catching up on has been super fun. We’re going to talk about a lot today. It’s masters week. The NFL draft is coming up, which I figured we kind of have to start on because you guys wrote a paper. I mean look, this is about a decade old. Do I have that right? Are we in the 10 year anniversary this summer?

Professor Massey:

Depends on what counts as the origin.

Professor Thaler:

More than that.

Meb:

Who came up with the idea? Which one of y’all was scratching noodles said, you know what, let’s take a look at the draft.

Professor Massey:

That part of the idea I can take credit for, but that’s only just getting us going. I remember explicitly walking into Dick’s office saying, Dick, I think you got to work with me on this.

Meb:

What was the reaction? Yeah.

Professor Massey:

I think I’d been around long enough. He felt obligated to help me with something. It’s kind of the way it goes, but also it helps that it was football. You see, if you want to drag Dick into something, it helps if he’s amused by it and he is amused by sports. But let me give you the date. That was 1999. That was the 1999 draft. About this time of year 1999.

Meb:

Well to date it listeners, the inspiration very well could have been 1999. You see who the first pick was Tim Couch. That may have been you pulling your hair out. Said Hold on, we got to talk about this. There’s a paper here somewhere. The year before it was Peyton Manning. I’m a Bronco fan, so that one may have been justified, but the next year not so much.

Professor Thaler:

Yeah, Peyton Manning followed by Ryan Leaf.

Meb:

And we’ll get into this. Tell us a quick thesis of the paper and then we’ll kind of walk forward if anything’s changed the world’s any different today.

Professor Thaler:

The basic question we were interested in is an economics question, which is people trade picks and I’m partly a finance guy and is that market for pick trading efficient? And it was our casual impression that it was pretty hard to forecast who was going to be good, but that teams were willing to pay out a lot of value in picks as the Panthers did this year with the Bears in order for the right to go first. And that would only be rational if it was pretty easy to determine who was going to be the best player, and is it? And if you just look at the list of names with any kind of objective I, you’re going to say, whoa, that looks pretty hard. People were roughly indifferent between Peyton Manning and Ryan Leaf, one of the best quarterbacks in history, one not in that category. And if that one’s a close call then.

Meb:

So that was the idea. You test it and turns out that what, that there was a sliver of difference. These guys were just flipping coins or there’s some real arbitrages here to have.

Professor Massey:

The first stat we ever looked into and it was kind of a, is this worth digging deeper question was what’s the probability that one player drafted is better over his career than the next player drafted his position? So the second quarterback versus the third quarterback, the fifth linebacker versus the sixth linebacker. And one of the rationales for that question is that’s often what a team is thinking about as they’re deciding whether or not to trade up. It’s like I can take this guy, he’s going to come to me the sixth best receiver, or I could trade up, I get the fifth best receiver.

So a simple stat, what’s the chance that a guy is drafted, a guy is better than the next guy at his position? And we literally call it the better than the next guy’s stat. And this is literally the first thing we look for to find out whether it’s worth doing all the work that you have to do a real research project. That probability across the entire draft is 52%, which is flipping coins basically.

Professor Thaler:

Yeah, I mean you think about if you were perfect it would be a hundred percent. If you’re literally flipping coins, it’s 50% and it’s 52%. And I should say that first draft of the paper was 2005 I think and was published quite a bit later because no one believed our results. But I was involved in a project of updating this stuff and various football nerds have also done so, and everything we found in 2005 is still true, including that 52% number, maybe it’s 53%. I mean the basic story is true and with much, much better data.

Professor Massey:

One of the most amazing things about that is that it’s not even just the basic story, it’s this weird shape. We found this weird shape. You wouldn’t expect this shape that we found that the value of a draft pick, it’s increasing from, we found it to be increasing deep into the first round. We found that the least valuable pick of the first round was the first pick because it’s so expensive. But it’s this hump. You get this hump in the first round and then it starts coming down. Very unusual shape. All these guys are replicating it now with, as Dick says, much better data. We had really coarse data and these guys are now using all the advanced stats and you get the same curve. It’s just remarkable. The same weird shape. It’s just popping out, replication after replication.

Professor Thaler:

So to be clear what that curve is, and I think if we had a conceptual breakthrough in the paper, it was to think about the value of picks in terms of surplus. So you get a player and you’re going to have to pay that player some money and there’s a salary cap that’s binding in the NFL, unlike in some sports. And so we’re economists, the value of something is how much you get minus how much you pay. And the league specifies how much players are going to get paid as rookies and it’s strictly declining.

So the first guy gets paid the most and then the second and then the third. And so the first pick, you have anybody you can choose from, but you got to pay that guy a lot more. And so how can it be that the 10th pick is worth more than the first one?

Well it’s because you have to pay the first one quite a bit more and he is only slightly better. And well now you can question about whether this curve slopes up throughout the first round or halfway through the first round. That doesn’t really matter. I mean it matters if you’re getting a sharp pencil out, but we don’t think the first pick is worth even as much as the 10th pick, that’s about what the Panthers trade was. Were they at 10 or nine? Something like that. And they paid a bushel basket of picks and a player to get a pick that we think is about as good as the one they had.

Meb:

So I’m guessing you guys side on the side of the Bears on this one, which is, you know, think about it, what’s kind of interesting, Panthers now owned by hedge fund manager, a slightly different type of hedge fund manager than the one that owns the Red Sox, the one that owns the Red Sox, little more quantitative, managed futures background. Very data analytic heavy, arguably one of the kind of best examples of adopting sports analytics early. What’s the grade you guys give this trade on both sides?

Professor Thaler:

I’m happy as a guy who’s lived in Chicago since 1995, I’m happy to see the Bears do something smart. That’s what I’m going to say. It was just a few years ago that they did the opposite. They traded up to get the first pick and took Mitch Trubisky.

Professor Massey:

And he traded like two spots. They gave up a bunch to move just a little bit.

Professor Thaler:

Just a few spots. And he was clearly not the best quarterback in that draft.

Professor Massey:

I mean that’s one that we had immediately. Our reactions instantly were this is, we weren’t alone. It’s a lot to pay to move up two spots for anybody, not just Mitch Trubisky. But what’s true is that one of the only substantive refinements to our results in the subsequent years has been that the quarterbacks look a little different. And the slope in some studies doesn’t go up at all for quarterbacks. If you’re drafting a quarterback, you want to be as high as possible, depends on the right price. There’s not that much difference between drafting 10th and first. It’s relatively flat in these recent studies, but what’s true is that all the positions are a little different, but there’s one that’s categorically different from the others and that’s QBs. And so if ever you’re going to hold onto those top picks, that would be the position.

But it doesn’t justify paying what they paid to move up to get that position. And it goes to something that we’ve said about the first pick all along. The first pick is the most pick valuable pick in the draft, but only if you don’t use it. You need to take advantage of that market value and move it.

Meb:

That’s a great line. And you think back, you guys talk about the chart Jimmy Johnson and everyone’s, they talk about the values and it’d be funny, I’m sure you guys could publish it and maybe you have an alternative value chart, like a little one pager for these NFL execs. Who do you think has really done a great job of adopting some of the ideas you guys talk about? Because you read the first line of your paper, two of the building blocks are modern neoclassical economics or rational expectations and market efficiency. I’m picturing like an NFL owner starting through this paper who’s really adopted it and then what are some of the main kind of offshoots of this? You start to think about other players and positions and running backs and kickers and everything else. How’s it all fold in?

Professor Thaler:

Yeah, I will tell you a story that Bill Belichick, who was an economics major at Wesleyan, read the paper. A Boston Globe reporter asked him. So I’m convinced that Belichick was fine without us.

Professor Massey:

There’s that famous Thaler humility.

Professor Thaler:

Yeah, yeah. See, there you go. I think that teams that are heavily into analytics are pretty well known. The Ravens, the Browns, the Eagles, the bills. Who am I leaving out, Cade?

Professor Massey:

I think you’ve just named the top groups for sure, but now we’ve a new maybe, we’re on the cusp of a new generation of analytics background GMs with KOC in Minnesota. We’ll see. You’ll give him some time. Give him some time.

Professor Thaler:

Oh yeah, he is very sharp and he was a protege of Andrew Berry at the Browns. So yeah, I think there will be more. I gave a talk at the sports analytics conference. So the last week of life as we know it, you were supposed to be in town and you didn’t make it right, Cade?

Professor Massey:

But I got the message that that was going to be a super spreader. I stayed at home that year.

Professor Thaler:

So this was March, 2020 and the theme of my talk was how long it takes teams to learn. And I have that chart of three point shooting and if you go back to the Larry Bird, Michael Jordan era, Larry Bird’s three point shooting percentage is about the same as Steph. Now I’m not saying he was as good because curry is unconscious, but if you just look at that percentage, it’s about the same. Larry Bird would take two again. Steve Kerr who was on the team with Michael Jordan had two years when he was 50% from three point range and he would get three shots a game, something like that. And so there’s a curve that just goes very gradually up.

I’m always teasing Daryl Morey that he was the first guy to be able to do the math. That 0.4 times three is greater than 0.5 times two and he gets paid a lot of money for something pretty simple, which of course is completely unfair, but it is shocking at how long that took. And it’s still the case that teams like the Sixers take it to the limit and there are some teams that still don’t seem to quite get it, but I think the league kind of gets it, but it’s 30 years and that was the point with the people going back and redoing our study. The first real written version was 2005.

So we’re 17 years out and well the Panthers haven’t read the paper and what’s happened is… Cade was talking about quarterbacks are different. The main thing is that they’re different is they’re worth a lot and that salary, it’s not a function of position. So all the rookies, they’re all getting underpaid. If they become starters, they’re bargains, but the quarterbacks are huge bargains. So Cade’s right that if you’re going to blow a first pick, it might as well be on a quarterback, but they’re not much more predictable.

Meb:

So who are they going to take this year, Cade? Is this set in stone? There seems to be three choices that everybody keeps floating around.

Professor Massey:

Well one of the interesting things to me is what I read at the time was that they didn’t have a particular quarterback they wanted to take. They just wanted the option of figuring it out.

Meb:

That makes it even stranger what an even stranger decision then.

Professor Massey:

I agree. But I also don’t think it’s uncommon. I think they’re still doing a lot of work this time of year between the end of the season and the draft. There’s a lot of sorting. You might think they seen enough, haven’t they got enough data, but there’s still a lot of sorting out. But we used to say the same that I believed it’s easy for these guys to be cool and buy our study in January, but by the time April rolls around they’ve seen so much tape and they’ve debated it with their guys around the table so much that they’re convinced that they know which players better than the other player, which offensive alignment they have to have of the two or three that they’re considering. And I’m sure it’s the same with quarterback.

Professor Thaler:

Yeah, they convinced themselves. The year our paper first came out, my friend David Leonard who was now a big shot at the New York Times but was then a young whipper snapper.

Professor Massey:

He was still writing sports back then.

Professor Thaler:

He would occasionally write a sports article. He is a big sports fan and he wrote a piece about it and somebody from the Bay Area interviewed me and the Niners had the first pick that year and they were spending months choosing between Alex Smith and Aaron Rodgers and they couldn’t decide. And a reporter calls me and says, if they asked you what would you do, what would you say? I said, I would put up a big sign, first pick 20% off.

Now of course they didn’t do that and they flipped a coin and it came up. Alex Smith and Rogers didn’t get taken until pick 20 or 22 or something like that. So if they had traded down to 10, they would’ve likely gotten Rogers maybe or Smith or whatever and a bunch of other players. And we just see that story repeated over and over.

Meb:

So when you’re trying to, let’s say you’re one of these teams trying to really assess these top players and let’s say they already kind of understand y’all’s paper, but you’re actually just focusing on picking the best player. But even between these three quarterbacks and thinking about combine, interviewing players, Cade, I know you do a lot of work in human analytics and performance measurement. How much does that play a role in their decisions? Because so much still seems like it’s kind of shoot from the hip almost like all the guys, the scouts sitting together at the Moneyball table from the movie and then all of a sudden you’re also thrown in something like, hey, you have this amazing quarterback prospect and he is Meb’s height 5’10 and that’s kind of an outlier where you’ve had a couple quarterbacks that are on the shorter side on the modern game. Anyway, feel free to take that any way you want, but trying to figure all these massive amounts of inputs. What do they do when they have something that’s kind of on the outskirts?

Professor Massey:

Dick and I have both spent time with teams over the years since this paper came out in 2005. We’ve spent a lot of time with probably three or four different organizations having a pretty good sense of what the process looks like. And first let’s just say it’s hard. I mean this is a hard thing and the best in the business are going to be wrong. It’s not unlike your business map. I mean it’s like if you can be right, it’s like the sports betters. If they can be right 55% of the time, they’re going to make a really good living. These scouts are in the same kind of thing. This is really hard to get right and there’s only more information available now,

But that is an argument for having good models human. We know enough about human psychology to know we aren’t great at integrating all these different sources of information in a consistent way. In fact, we’re tragically bad at it. And so the best organizations are finding ways to integrate these very different sources of information, but they do so they can help in doing so. They do so mechanically, they do so with models. Some sports are ahead of other sports. If you go to baseball, almost every team is pretty heavily model based with some human inputs. But you go to football and it’s still largely human with a few model inputs and it’s hard to do that way.

Professor Thaler:

I mean I know of one case where a team brought in a quarterback and the coaches just didn’t think he had the look of NFL quarterback and they took somebody else who was clearly worse.

Professor Massey:

Now out of sympathy, Dick, out of sympathy, this is the way the process works, at least in some organizations it’s astounding. The scouts will spend 12 months on this process and they’ve got all the meetings and all the visits and all the reports and they set the board with themselves. And then at the last minute, almost the proverbial last minute, the coaches roll in and they start chiming in. And the first time I saw this I was like, oh my god, this was hard enough before and now you’ve got this whole additional set of considerations.

But let’s acknowledge that it is a political job and they’ve got personalities to manage, they’ve got relationships to manage, they’ve got a building to manage and how you incorporate the coach’s perspective or not is important part of that. And so this is a hard thing for a general manager to do. He’s got a head coach who has a preference between those quarterbacks. That’s the most important player coach relationship in the building. And so you got to factor it in somehow or you’ve got to have at least a process for not factoring in one of the two. It’s delicate. That’s a delicate business.

Professor Thaler:

Yeah. And then every once in a while the owner has an opinion too.

Professor Massey:

Every once in a while.

Professor Thaler:

Just occasionally. And some of them have pretty strong opinions even favoring the school they happen to be an undergraduate at. So one thing that I’ve sort of appreciated over the years is how much I would not want that job. I mean it seems, oh man, that’s the dream job. You’re living the dream, you’re getting a lot of money to basically do what you like to do for fun and then something happens. I don’t know, remember when Tony Romo fumbled the extra point snap and the team loses? Well that’s not any model. And I bet Tony Romo did that exactly once in his career and it was in a crucial… and I don’t know why I’m picking that, they just jumped into my mind. But there’s so many thousands of those things over the course of the season and as the season goes on and you get into the playoffs, they all get magnified. And look, Billy Bean never won a World Series, so some people still think he was an idiot.

Professor Massey:

Dick, what did Daryl say one time about some text he was sitting down or was it Sig Mejdal? Maybe it Sig. I think it was Sig. It’s some playoff game when he was assistant GM down at Houston and the start of the playoffs games, he was like, how’s it going? Sig goes, I’m just sitting here waiting to see which side the dice turn out. It’s just like all of we’ve invested into these playoffs. So now it’s essentially going to be a flip of the coin.

Meb:

Well, that’s what makes it so fun.

Professor Thaler:

But yeah, I mean I would not have the stomach for it.

Meb:

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It’s funny because even being a quant and kind of knowing everything you guys have said, just playing through back like my personal childhood of being a Broncos fan and I look at you and I say, well wait, here’s the exception of John Elway, right? The number one pick that changed the trajectory of this franchise. But in the back of my head I’m thinking about when Dan Reeves drafted Tommy Maddox, but also Terell Davis and Shannon Sharpe, which I think were sixth and seventh rounders who are now Hall of Famers and almost got cut in Terrell Davis’s example.

Professor Thaler:

We can’t end this conversation without mentioning Brock Purdy.

Meb:

Go ahead, let’s hear it.

Professor Thaler:

Right? I mean the Mr. Irrelevant literally the last guy taken in the draft. I don’t know whether Kyle Shannon even had an idea who this was. They probably had an eye on him and thought they’d sign him as a free agent or something like that. But everybody else gets hurt and he comes in with a few games left and looks like the real deal. And you think about Kurt Warner, right? He, he’s bagging groceries and playing arena football and I’m always wondering how many people are out there.

Meb:

You think about putting on some cleats, professor, like what’s the-

Professor Thaler:

Yeah, well no after I win the masters this weekend, but no, look, Tom Brady taken the 199th pick wasn’t really the starter at Michigan. And there’s another role of… if Drew Bledsoe doesn’t get hurt, who knows whether Brady even gets a chance.

Professor Massey:

MEB, you should know Dick’s favorite players in sports are late round quarterbacks who take their teams deep into the playoffs. This is literally his favorite thing that happens in sports. We’re never going to run out of examples. It’s wonderful. So Brock Purdy was a gift, but he’s also raising an interesting point about what determines the success of these quarterbacks. And we tend to think they’re either a great specimen, they’ll grow into this great quarterback, individual contributor or they won’t and we don’t appreciate all that happens around them that either facilitates or hinders that success.

So just consider a couple of examples. I don’t remember the ’83 Broncos well enough to know what Elway had around him. I do know took him until the last two years of his career to win a Super Bowl. But consider the system Brock Purdy got dropped into and how advantageous that was for him and his particular skillset. Consider who Brady got matched with in New England for all those years. And so we just think of this as a more independent process than it actually is. And again, it leads us to over exaggerate the differences between these quarterbacks when we’re undervaluing altogether important factors that contribute to their success.

Professor Thaler:

Cade and I have had many long arguments with the buddy of ours, Alec, about whether the role of a quarterback is overemphasized the importance, which is my view and a Alec’s view is that you, it’s impossible to overestimate how important the quarterback is. And I would make a completely ridiculous argument that you could win a Super Bowl with Nick Foltz as your quarterback.

Meb:

I thought you were going to say win a Super Bowl with Tim Tebow. That was going to be my argument.

Professor Thaler:

Or Joe Flaco. So I think the point I’m making is if you put a quarterback on a really good team with good coaches, they have a chance to succeed. I have no idea whether Brock Purdy is an NFL quarterback and if the Panthers could take him, would he succeed there? I don’t know. And it’s not like Nick Foles was a great quarterback. We got to run that experiment when he wasn’t with the Eagles in a good organization, he wasn’t as good. But how good really is Mahomes Mahomes plus Reid is a show we all would pay a lot of money to watch and imagine if he’s getting sack six times a game that’s not going to be as pretty.

Meb:

So you’re saying you just got to trade your star quarterback for a ton of picks and that’s the advice you’re going to give everybody that will not be popular professor.

Professor Thaler:

No, you need 53 players and I like the Bear’s hand better than the Panther’s hand because they’re going to get a lot of players and fields their quarterback. I don’t know about him, but he’s probably the expected value of what the Panthers will get.

Meb:

It’d be funny when the Bears actually draft another quarterback that would be, that would just set the world on fire. It’s like their other pick. They just take another quarterback.

Professor Massey:

It could happen and maybe that’s the way to go. I mean until you’re sure you have your guy and it’s unlikely you do by the way base rate strongly against it, you should be keeping as many rods in the fire as possible and this is the worst place you want to be. Having the guy and paying him proper market money is a winning proposition. Having a serviceable person at a rookie contract is a apparently winning proposition. What you don’t want is some middle ground at the full price because that’s kind of the alternative and yet a lot of teams sign up for that gig on a regular basis.

Professor Thaler:

Maybe one other thing we ought to bring up that’s interesting about all of this is what’s going on with Lamar.

Meb:

So what is going on? Explain this to the listeners.

Professor Thaler:

I have no insider information, but what can we all see. Lamar is obviously a very good quarterback. Many people, particularly people at the Ravens, think that the Browns overpaid Watson. Now I don’t think they paid more than they had to. They were the high bidder in an auction and obviously I don’t want to get into all the other factors that went into that particular signing, but if we just go into the economics of it, they sort of set a price and Lamar thinks that he’s about as good a quarterback as Deshaun Watson and obviously can make that case.

Meb:

An economist may say he’s anchoring.

Professor Thaler:

A behavioral economist might say he is anchored on that and loss averse. So if Deshaun’s getting 50 million and Lamar, poor Lamar only has to settle for 40 million a year, he might be unhappy about that. But it certainly puts the Ravens in a box and there’s talk that the owners are all colluding. Again, I have no information about that. I don’t know how we would know. We have seen that in other sports occasionally, but it’s certainly, supposed the Panthers had just said, made an offer to Lamar. Lamar is certainly better than the expected value of the quarterback they’re going to get.

Professor Massey:

But he’s significantly more expensive. So back to your surplus question.

Professor Thaler:

Well, but yes, that’s true. That’s true. But what you hold is to sign a guy that you want to re-sign at market. Yes it’s great if you get Josh Allen on a rookie deal for four years.

Professor Massey:

I mean it’s not just gravy. I mean that’s part of the deal. I mean they’ve almost won the Super Bowl a couple years running on that rookie contract partly because of that rookie contract.

Professor Thaler:

But that’s run out.

Professor Massey:

That has run out. But they had a good couple of runs at it. It could happen.

Professor Thaler:

Oh, absolutely.

Professor Massey:

Did it happened?

Professor Thaler:

Absolutely. And other, the Bengals, are the Bengals going to be able to continue to be good if they have to pay him market, it’s going to be hard, right?

Professor Massey:

Well the Bengal made an appearance in the history of this paper, Meb. The name of the paper is the Loser’s Curse and where they came from lit. I remember sitting in my office when we estimated this curve for the first time and it went up, meaning the value of the draft picks went up from one to 32 meaning the least viable pick in the draft in the first round, not the whole draft. And the draft was the first pick, one of the first things that was said, I don’t even know which one of us said it was. This explains the Cincinnati Bengals because at the time they were just mire, they’re just decades of not doing much and the idea was they keep on getting these early picks, but the early picks are actually a curse unless you move them.

Meb:

Thinking back to this paper’s been out for a while and it’s a little more esoteric than say the three point example in the NBA. I mean thinking back to that is any high school level stats. You didn’t need Bill James to figure this out, could just kind of do the math and sit there and say, huh, this is odd. Why don’t we run an experiment? Why the people do things different? This one’s a little more complicated though clearly it’s caused some real behavioral changes. When you look at the broad tapestry of why this ARB still exists, why this behavior still exists, is the simple answer just incentives and career risk or is it something more complicated? Why do we not have an AI version of professors Cade and Dick that can just say the Broncos pull up on draft day and they say, all right, well let’s just run the algo, just let it spit out ChatGPT version of these professors.

Professor Massey:

Well the quick thing is the robust effects are generally overdetermined. That’s the reason they’re robust. There are multiple factors contributing to them. And so in our paper we unpack whatever three or four and we stop short of all the real world factors. So Dick can unpack some of them. I just want to say up top when you see something this robust, it generally means that there are multiple factors pushing in this direction.

Professor Thaler:

Let me say something that may or may not be helpful. Another example that’s more like the three punch shop about football is punting. And the first place we ever presented our paper, most fun thing I ever did was organize a conference in Scottsdale in spring training just with a bunch of my buddies. David Rommer presented an early version of his Going Forward on Fourth Down paper, we presented our paper. Bill James was there, Billy Bean actually showed up for half a day.

But that punting again, now all the football geeks agree with Rommer’s initial valuation again with much, much better data and teams are slowly getting better and many of the smarter teams have some analytics person that’s whispering in the ear of the coach to help them. But what I think is true, not taking enough three point shooting and not going forward enough on fourth down and not trading down these can last a long time because doing the right thing is unconventional and if you do something unconventional and it doesn’t work, you get hammered. I remember once Belichick went for behind the 50 and didn’t make it and people were ready to fire it.

Professor Massey:

Literally set the league back years on 14th.

Professor Thaler:

And so again, it’s easy for us to say what we would do that we’re applauding the Bears this year and dumping on the Panthers. But if I’m a general manager and I’ve got three kids that I have to pay tuition for and I’ve had two bad years and the fans are grumbling and my owner is cranky, it’s easy to do the popular thing and it’s hard to do the different thing.

Meb:

Sounds like you’re describing the entire field of institutional money management. If I had to liken it to my day job. When you mentioned Belichick, I thought for a second I keep bringing this back to the Broncos. I thought you were going to talk about when Brady funded on third down, which is a tactic you don’t see very much anymore. It was against the Broncos. And I said as far as quant ideas, that’s definitely way out there as far as analytics question.

So 10 years in the future, we’re at the MIT analytics conference hanging out with Cade and he is hosting a panel. He is looking back and say, man, 2023, that was obvious, this glaring example in 2023. So the three point example of 30 years ago, what is the most glaring example you guys look at today that athletes or teams or owners ignore? Is there anything that comes to mind where you’re just like, this is so obvious, why doesn’t anyone do this? Any thoughts?

Professor Massey:

I’ll give one candidate. It’s not that no one does it, but it’s given how obvious it does seem. I’m not sure, I’m not sure why more teams don’t do it and it’s just position value in the draft. So it’s been talked about for a long time, but it was really clear in one of the recent replications of our work where they broke the curves out by every position. And you just see how much more valuable, not only the quarterback is from the other positions, but how some of the other high profile positions that like cornerback, edge rusher, they’re just worth more than mostly in inside positions. And some teams pay attention to that when they allocate their draft capital. What that’s suggesting is you have to populate all these positions of course, but you only get some of them through the draft, early round draft picks.

Some positions are just so much more valuable. You get 50%, a 100%, 75% more value just by getting the right position. You can’t get that by picking the better player. No team is reliably better at picking players at another team. Just pick the right position, allocate the capital, the early draft capital by position, and it’s just the expectation is that you have significantly better value. Some teams do this, but it ought to be given the differences. It ought to be the only way the early capital is spent. And I suspect over time more and more it will go that way.

Professor Thaler:

Earlier I was making the completely blasphemous argument that quarterbacks are considered too important. And I think part of that is that they’re involved, they touch the ball on every play and everything they do is highly salient. A less controversial and in fact, conventional wisdom among the analytics community is that running backs are overvalued. And I think the smart teams are not drafting running backs in the first round and compare a running back to the left tackle, the running back breaks one for 50 yards and looks like a hero and everybody can say, wow, look at that guy. The left tackle, the only time you notice him is if he screwed up, he held or his guy got by him and sacked the quarterback. So I think there’s a pretty simple salience story for why running backs would be overvalued and offensive linemen would be undervalued.

Professor Massey:

Dick, I don’t know if you remember that when we first ran our analysis and broke it up by position, we found one, that the expected value, the expected surplus for every position at every point in the draft was positive because of those rookie contracts. Just like you said, it suppresses value, fine. But when you break it out by position, the one position that was negative anywhere in expectation was early first round running backs. It was literally the only position and the only point in the draft where you have literally negative expectant surplus and that we saw that in whatever it was, 2004, 2005.

I think you’re right that people are picking up on this clearly, but some aren’t. I mean, how long ago was Saquon Barkley the second pick in the draft three years ago maybe. And lauded across the board by many people. And so there’s some wisdom growing on running backs, but it needs to expand into inside linebackers, interior offensive linemen, even into safeties. Just that philosophy needs to grow and all you got to do is look at the expected surplus by position in that first round. And it is categorically different across some of these positions. Other than trading away picks, especially trading away for future picks, there’s no better guaranteed value than allocating it to the right position.

Professor Thaler:

Something you just brought up Cade reminds me that’s a point that we haven’t talked about but is particularly relevant for your crowd, is probably the most surprising anomaly we found was the discount rate for future picks. And people that have come into the league and started studying this have come back to me and say, wow, yeah, I didn’t believe you guys, but so there’s a rule of thumb that you can trade a third round pick this year for a second round pick next year. So you get one round per year. That’s the exchange rate. Now it’s simple, but when we ran the numbers back in the day, that came out to be a discount rate of 137% or something like that.

Professor Massey:

I had the exact same number and neither one of us is in the paper in years, but that’s the exact same numbers. So don’t say it’s like, we’re not exaggerating. It’s that precise, it’s that high, a 137%.

Professor Thaler:

So smart teams are trading picks this year for picks next year.

Meb:

That’s crazy to me. Is that front office, is that owner? Because I’m like, again, if I’m the Waltons, I’m going to send this to my Broncos people. If I’m the Waltons, I’d be all day long be like, you know what we’re going to do the long game. And every day of the week you would make that trade.

Professor Thaler:

First of all, it’s often the owner who wants to win now. So why do you need to do that ARB? You need an owner who buys in and a GM who is confident that he is not going to get fired.

Professor Massey:

Already those two things are rare. Already that combination is rare.

Professor Thaler:

And if the teams that have been doing it are teams where those things are present and if the owner isn’t predisposed to that, he’s been persuaded of the error of his ways. And I think it’s easier to say than to do. And it goes back to the going forward on fourth down. I think that is now considered to be smart, whereas it used to be considered risky and the announcers of course still haven’t gotten this. Oh, he is rolling the dice, right? Like you’re at midfield and you punt the ball to Patrick Mahomes, there’s no dice rolling there, what could go wrong? But instead you go for it and fourth and one at midfield that’s rolling the dice.

So I think as conventional wisdom changes, then it gets easier to do the right thing. So what the smart teams are doing is if they’re doing a deal, and I don’t know the details of this Bears Panthers deal, but I suspect there were some future picks in there. The teams that trade down also tend to be willing to be paid in future picks because they’re the teams that know that that’s the ARB.

Meb:

All right, my AI over here says the Bears get Carolina’s nine, they’re a late second round pick number, 61. 2024 first round in a 2025 second round.

Professor Thaler:

There you go.

Meb:

But the Bears get D.J. Moore.

Professor Thaler:

Yeah. And you’re going to see that pattern that the teams that are willing to move all the way back to nine and get a boatload of picks, they’ll get some of them next year. And because the team they’re dealing with is impatient.

Meb:

My team doesn’t have a first round pick this year, the Broncos because of the Russell Wilson trade, which I don’t want to spend any time on because it’s probably too traumatic.

Professor Thaler:

I think I’ve got another hour we could devote to Russell Wilson.

Meb:

On our last podcast. As I was talking kind of in the money management world, I was trying to figure out how to align some incentives because I see investors do dumb stuff all the time. Not just retail, but institutional too and trying to figure out ways to make them help them behave. And Cade, you had a great article where I was talking about algorithms and people don’t trust them, so you kind of tweak them a little bit, but also think about the incentives of the front office or the owners where you say, you know what, and I heard one of you guys talk about this, but said, Hey, let’s tie part of your compensation or structure to how much we’re winning 3, 5, 10 years from now, not next year, but act like, and I don’t know if anyone would ever design a contract that way, but what an interesting, obvious sort of alignment idea.

Professor Thaler:

You don’t even really see that in the business world much. I mean you see it indirectly that high level managers are getting paid in stock options, but I think it’s quite rare that they get paid for out years. And I think it would be really smart, and there are lots of people in charge in business and in government that will take a win now and let somebody else bear the cost of it later. And there are pension plans all around the world that suffer from that. And the big demonstrations going on in France are an example of it. The people before Macron knew there was a problem and didn’t have the guts to fight it and he’s trying to do the right thing and I don’t know whether he’ll survive it. So doing the right thing is hard.

Meb:

Cade, you’re not in an agreement over there. You got any thoughts?

Professor Massey:

Oh, I love it. I’m fully aligned with Dick on this and I’ve had these kinds of conversations and just for some reason it seems beyond practical, beyond what people feel they can actually do. And Dick’s right, if they’re not doing it in what we think of as sophisticated organizations, businesses, big businesses, what hoped we have of seeing… these sports franchises are pretty family, small. They’re not run with that same sophistication, but anytime you have managerial consequences downstream, their incentives should be connected to that consequence.

Meb:

Well, you guys are not in agreement a lot. What do you guys disagree about when you get together for a round of golf or coffee or beer? What are you guys actually in disagreement about?

Professor Thaler:

Oh, don’t get us started.

Professor Massey:

There’s some subject, there is one subject in particular that we’ve agreed to not talk about ever.

Professor Thaler:

Yeah. And it’s it not like I once kicked this dog. It’s like the wonkiest thing you can imagine, and you’re not going to attempt us to get into it right now, but we both have pretty high opinions of the other’s intellect except on this issue where we think the other guy is just an idiot.

Meb:

This is a good preview for the next podcast we do together. You guys will sing.

Professor Thaler:

We could do a whole podcast on this.

Meb:

This is the page turner at the end, and they’re like, he gets ready to fall for Cliff. You never know.

Professor Massey:

Maybe you could adjudicate, we could decide we could roll it out as a case and you could decide in the end and then that would be it that we’d decide for all time. Who wins the argument?

Meb:

You guys, this has been a blast. I would love to keep you for another hour or two. I didn’t even get to any of my show notes, but it’s masters week, professor, I know you’ve played there. I was going to try to do some sort of reader poll to see you. It’s like the old jelly beans in the jar. Who could guess your score when you played Augusta and see who comes closest without knowing anything about you.

Professor Thaler:

I can tell you that most amateur golfers would shoot a score similar to the one they shoot at their home course.

Meb:

Okay. And the average amateur golfer also doesn’t break a hundred.

Professor Thaler:

Yeah. So take a bogie golfer, they’re going to find Augusta from the member. They’re only two tees. There’s the master’s tees and the member’s tees and from the member’s tees and they haven’t rolled the greens because the members don’t want to but the ball into the pond on 12. But there’s no real rough and every blade of grass has been manicured with nail clippers. So it’s beautiful, but it’s not that hard for an actor.

Meb:

Cade, he sounds like he’s making excuses, trying to talk down that he actually shot in the 80s or something on this course. So

Professor Massey:

Dick can score the, but the most interesting thing to me about this is that Dick wins the Nobel Prize and he can kind of, the world is his oyster, right? He can do anything. Literally just what do he want to do Dick and the thing he wanted to do, I mean more power to him. He wanted, there was one thing he wanted from the world and that was to play the masters that played Augusta.

Meb:

It was all worthwhile. There you go. All those years toiling.

Professor Thaler:

I wouldn’t mind doing it again, by the way.

Professor Massey:

Yeah.

Meb:

Listeners, if you want to take these guys up on a foursome, let me know. I’ll help. All right, who’d you guys pick? Last question. Who’s on favorite to win this weekend

Professor Thaler:

In Cade’s honor, I’ll pick Scotty the Texan.

Professor Massey:

Well just to make it a twofer, then you took the literal market favorite, which is I think a very reasonable thing to do, but I’ll just make it a Longhorn twofer and take Jordan Spieth for finally getting over the major hump after a long drought and one of those longhorns. Surely one of those Longhorns will get it done.

Professor Thaler:

Meanwhile, I’ll be rooting, I spend half my time at Berkeley and I’ll be rooting for Homa and Morikawa who are two Berkeley guys, and obviously either of them could win as well.

Meb:

Well, Scheffler seems like the safe pick. You guys have talked about the hot hand in golf, so I’m going to go with the cold hand. I don’t know if he’s ever won the Masters. Either way it’s been a while. So I’m going to take McIlroy. Has he ever won the Masters? I don’t know that he has.

Professor Massey:

I don’t think. I don’t so.

Meb:

He’s been a long drought, although he’s always there.

Professor Massey:

Love it.

Professor Thaler:

No, you’re not going out on a real very far list.

Professor Massey:

None of us. None of us are very far. We just named three of the top eight offers on the Odds List.

Meb:

Gentlemen, it was a blessing. Thanks so much for joining us today. Appreciate it.

Professor Thaler:

Pleasure.

Professor Massey:

Thoroughly enjoyed.

Meb:

Listeners, if you enjoyed this episode, check out the link in the show notes for our episode last year with poker champion Andy Duke, where she talked about quitting and some best practices around decision making.

Podcast listeners will post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at themebfabershow.com. We’d love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.

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