The Value of Winning the Lottery in the NBA

Posted on May 25, 2007 by

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Yesterday Darren Rovell – of CNBC — offered some analysis of the economic value of Portland winning the NBA’s Draft Lottery. Stephen Dubner – of Freakonomics – looked at Rovell’s analysis and stated: ‘I don’t know what the Wages of Wins boys would make of Rovell’s analysis, but it’s well worth a look.”

Given this assignment, I spent yesterday thinking about the economic value of the number one pick. Here is what I came up with.

Analyzing Gate Revenue

The value of the first pick can be separated into two effects – the anticipated and actual impact:

1. With the first pick fans might anticipate a significant leap in the standings. Consequently, there might be value in just having the number one pick, as season ticket sales might increase the summer before the season begins.

2. Fans will also respond to any actual increase in wins.

To get at these two effects, I turned to the gate revenue model we discussed in Chapter Five of The Wages of Wins. This model links regular season gate revenue – weighted average ticket price multiplied by attendance – to a variety of factors that might impact a team’s fortunes at the gate. This list of factors includes wins this season, wins last season, star power, market size, stadium capacity, etc… To this list of factors I added a dummy variable for having the number one pick in the draft.

The model was estimated with data from 1992-93 to 2003-04 (and no, I was not going to update the data set in one day). The results indicated that just having the number one pick was worth, on average, about $2.5 million in 2003-04. This translates into about $2.7 million in 2007.

It’s important to note that this value seems all about anticipation. There does not appear to be any link between gate revenue and having the number one draft pick two years ago (so Toronto cannot expect additional revenue in 2007-08 from having the number one pick in 2006). I would also add, that what I found for the number one pick this year is not seen when we look at the team that picks second. Second choices do not seem to increase gate revenue.

This story is quite similar to the tale we told about “star power” in the NBA. As we noted in The Wages of Wins (and I noted in The New York Times last February) “star power” – by itself — does not seem to have much value for the team employing the star. At this point, Blazer fans anticipate more wins with either Greg Oden or Kevin Durant (the two players Portland is considering). If those wins do not happen, though, Oden and Durant – even if people believe they are “stars” — will probably not continue to attract many fans in Portland.

But of course, if those wins do happen, then Portland can anticipate even more fans to come see this team play. Is it likely that Oden or Durant will generate wins next year? I could forecast each player’s performance next year, but my model connecting college performance to the NBA is not finished yet (should be done in the next few weeks). Although I cannot forecast Oden or Durant’s production right now, we can look at what past number ones did their rookie campaign.

Table One: Performance of Number One Picks – 1992 to 2007

As the above table illustrates, the average number one choice since 1992 (covering 15 seasons) produced 7.6 wins and offered 0.129 wins per 48 minutes (WP48). So on average, these players were above average (since an average player offers a WP48 of 0.100). But there was quite a bit of variation. At one extreme you have Shaquille O’Neal and Tim Duncan, two players who produced more than 20 wins each their rookie season. At the other extreme are Andrea Bargnani and Kwame Brown, two players in the negative range. Over these fifteen seasons, only five times was the best rookie – in terms of Wins Produced – also the first player chosen overall. And as the following table highlights, five times the best rookie was not chosen with one of the first five picks in the NBA draft.

Table Two: The Top Rookies – 1992 to 2007

Given all that, it doesn’t look like having the first pick guarantees that a team will acquire a productive player. Still we have reason to think that Oden and Durant are each likely to be very good (I don’t need a model to make that statement). In other words, Portland thinks they are getting something closer to Shaq or Duncan (as opposed to Bargnani or Brown).

Let’s say that Portland truly has hit the jackpot and Oden/Durant actually produced20 wins in 2007-08. The aforementioned gate revenue model indicates that each win is worth on average about $270,000. So twenty wins is worth about $5.4 million in additional gate revenue.

If we put together the value of just having the first choice with the actual wins Oden/Durant might produce, we see that this choice might be worth $8.14 million in gate revenue alone. Such a figure is not too different from what Rovell suggested (and if Oden/Durant produced 13.36 wins next season our numbers would be identical), although our methods were not exactly the same.

Rovell noted that Oden/Durant would command $4,662,000 in salary next year. So using my numbers, the net is “only” about $3.5 million. Is this enough money to motivate teams to try and improve their lottery position (by not trying to win games)?

Moving Beyond Gate Revenue

Actually there is quite a bit more to the lottery story then a simple analysis of gate revenue in a player’s rookie campaign. Consider the case of LeBron James. A few days ago (and again in the above table) I noted that LeBron did not get off to a great start in the NBA. But over the past three seasons LeBron has been very good, producing 59.5 wins or about twenty per season. For these wins the Cavaliers paid $14.77 million, or about $250,000 per victory.

Last summer LeBron signed a contract extension with Cleveland that will come closer to paying him his market value. This contract begins in 2007-08 and is scheduled to pay LeBron $41.3 million over the next three seasons. And if LeBron does not become more productive (given that he is already producing close to twenty wins each year, it seems unlikely he is going to become that much more productive) the Cavs are now going to be paying close to $700,000 per victory. Or, over the next three seasons the Cavs will pay $26 million more for the same level of production.

The LeBron story highlights the true value of the number one pick. Although we saw that in some years the top rookie is not much of a prize, in some years you can land a player like Duncan or LeBron. And when that happens, a team can suddenly employ a top NBA player at a fraction of the cost.

And saving money is not the only motivation teams have to try and work the lottery. As I noted last summer in discussing Gilbert Arenas and the Washington Wizards, if a team is going to be among the very best it needs its top player to also be among the very best in the NBA. In 2005-06, Arenas was the Wizards best player with a WP48 of 0.157. If all your players on your team offered a WP48 of about 0.150, your team would win about 60 games. But it’s extremely unlikely that you could have an entire team that is just as good as your best player. In other words, for a team to reach 60 wins it’s going to need one or more players to offer a WP48 far in excess of 0.150.

Often, although not always (for example, see Kevin Garnett and the Minnesota Timberwolves), lottery teams do not have one major talent that is a necessary (although not sufficient – again see Minnesota) condition for title contention. So another benefit of the top pick is that a team can acquire that one talent it needs to at least dream about contending for a title.

When you consider the cost savings of the top pick, coupled with the chance to build a title contender, it becomes easy to see why Beck Taylor and Justin Trogdon uncovered evidence that NBA teams do indeed try to win less in an effort to secure a better draft choice. The payoffs for teams that win the NBA’s lottery are indeed similar to winning a lottery.

– DJ