Rational Actors in Sports

Posted on May 3, 2006 by

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A few weeks ago I noted the research of Cade Massey and Richard Thaler.  At ESPN.com, Tuesday Morning Quarterback – Gregg Easterbrook – casts doubt on the work of these two economists. According to Easterbrook:  “Researchers Richard Thaler of the University of Chicago and Cade Massey of Yale got some ink for a study suggesting low NFL draft picks are worth more than high picks because the high picks get huge bonuses that crush a team's salary cap. The NFL draft system actually penalizes losing clubs by awarding them top picks, the researchers maintained, because on average highly drafted players are overpriced compared to what they accomplish. Tuesday Morning Quarterback is suspicious of this finding. If a high choice actually is worth less than a low choice, why don't teams with high choices simply swap them for low choices?” “…Thaler's and Massey's paper seem to me another instance of abstract academic theory that ignores how people and organizations behave in the real world. Presumably most NFL teams are what economists call "rational actors," and would get rid of high picks if such selections actually were worth less than low picks.” 

What do we learn from this quote?  Apparently Easterbrook missed the point of the Massey-Thaler paper.  Let’s imagine for a moment that people in the NFL were perfectly rational and understood their environment.  Then Easterbrook would be right, inefficiencies in the marketplace would vanish due to competitive forces.  But Massey and Thaler are arguing that Easterbrook is incorrect to assume NFL teams are run by “rational actors.”  Consequently, as Massey and Thaler argue, inefficiencies persist.  To see this point, one does not have to read the entire Massey-Thaler paper.  All you have to do is read the last sentence of their abstract: “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.”

I would add that the conclusion Massey and Thaler reach about the NFL is consistent with what we found in our examination of salaries in the NBA:  Rational actors in sports are not quite as common as strict economic theory, and Tuesday Morning Quarterback, might suggest.  (Thanks to Rich Campbell for alerting me to the Easterbrook analysis).

– DJ