The NFL Draft: bad decisions and bad owners

Macroeconomics 114

I need to reset, so I’m going to my happy place—sports! This is relevant because the NFL Draft started last night and is continuing today, remotely, and it’s the only thing resembling a professional sporting “event” that’s happened in over a month. I sat down to watch it, and quickly remembered why I never watch the NFL Draft. Talk is cheap; I value action. The NFL Draft is a monument to how bad we are at predicting the future, especially when the predictions involve human behavior. These are billion-dollar corporations who have nearly unlimited resources focused on one single goal: pick a player that’s going to be good for your team. Dozens of people involved and hundreds of hours of research focused on a relatively small amount of test subjects. They have nearly unlimited access, too, the NFL combine is uncomfortably dehumanizing with their depth of their analysis—at least Joe Burrow kept his sense of humor after a whole news cycle circled around his smaller-than-average hands.

Considering retirement after I was informed the football will be slipping out of my tiny hands. Please keep me in your thoughts.

— Joey Burrow (@Joe_Burrow10) February 24, 2020

The point is, no other company or industry comes close to the amount of research NFL teams invest in their potential employees.

Year-after-year, they get it wrong. Generally, the players drafted earlier are better than ones drafted later, but the number of swings-and-misses, and late round or undrafted players who become stars, is downright impressive. Bill Belicheck, the greatest NFL coach of all-time, has an awful record of draft picks. The most impressive thing about the Patriots stretch of dominance is how little talent they acquired via the draft. Tom Brady, the greatest NFL quarterback of all-time, was the 199th pick in the 2000 NFL draft, and they didn’t get much better in the last 20 years. In the 2017 draft, the Bears traded up to take a quarterback they have now given up on, and quarterback Patrick Mahomes was taken seven spots later (he won MVP in his first season as a starter). In 2018, the Arizona Cardinals traded up to use their first round draft pick (no. 10) on quarterback Josh Rosen and signed him to a four-year $17,597,756 contract, then, the very next year, drafted another quarterback No. 1 overall! Props to them for avoiding the sunk cost fallacy?

These are just the most mainstream examples, not even close to a deep dive. Here’s a taste: of the 774 players who played 40% of their teams snaps in 2017, 133 were UNDRAFTED. Close to 20%.

How can you not view the draft as a testament to the limitations of “experts” and the limitless unpredictability of human action? The single biggest “crypo-theme” of life and the stories we tell is “I thought this one thing was going to happen, and something else happened instead”. That view is adopted from this TedTalk: On Being Wrong (I showed it in sophomore Econ this semester, but not senior Econ).

A major reason is the complications of the situations these 20-ish-year-old athletes are placed into. How good are their coaches? How healthy is the locker room morale? Who are they competing with to get on the field, and who is mentoring them, if anyone? Those things matter more than we can ever know, and I think this adds to the argument against our capability to predict human behavior. Since it’s impossible to measure any of those factors or even understand the number of variables at play, we just do what humans do best when faced with complexity: ignore it! If someone plays a lot and scores touchdowns, he’s great, and if someone doesn’t play a lot and doesn’t score touchdowns, he sucks.

[Side note: on a scale of one to charming, how funny is it when draft prospects are graded on their “intangibles”??]

Second, teams do not have complete control over when they pick or who is available. Sometimes the teams making decisions in front of them act unpredictably. Sometimes trades happen, and teams move up or down in the order. Again, I see these complications as supporting my argument for the impossibility of predicting the future well, consistently. Sometimes you can even tell when a team panics as their time to make a choice counts down toward zero, a feeling everyone who’s ever played fantasy football understands intimately.

The third excuse is the amount of cooks in the kitchen, so to speak. Each team has to take their entire comprehensive body of knowledge and condense it into one decision at a time. As of 2018, NFL teams had an average of 22.3 coaches on staff, and that does not include scouts, analytics department, etc. Then there’s the owner. It’s common for a fired coach to defend his failed draft picks by insinuating he wasn’t allowed to draft “his guys”, i.e. suggest the owner was overruling his decision. I believe it to some degree in some cases, but it’s also a suspiciously convenient excuse.

Imagine for a moment, in light of all the evidence of ineptitude and failure we have here from 32 teams independently trying to make good decisions, if we just simplified it and put Roger Goodell, the NFL commissioner, in charge of drafting. He is in charge of figuring out the best players for each team, what order they are selected in, what their contracts are, all of it. Would that be a better, or worse, system? With centralized authority and so much at stake, it’s not difficult to see owners (or players, or fans) trying to influence the system to gain an advantage. What if the NFL wants the big-city teams to be the ones that make the playoffs, for the TV ratings? Even if Goodell is incorruptible, the best thing he could do is decentralize and he still would have every team complaining about whatever system he creates.

The lesson is we are already bad at making decisions, and central planning doesn’t make us better.

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This is the halfway point. Pause. Here’s my blog/podcast recommendation of the week. The podcast is Afford Anything, by Paula Pant, specifically the post: I DON’T KNOW HOW TO INVEST AND I’M AFRAID OF MAKING EXPENSIVE MISTAKES. Yes, she posted the title in all caps. She starts every episode by saying “You can afford anything but not everything. Every choice that you make is a tradeoff against something else; saying “yes” to one thing implicitly means that you’re saying “no” to something else. And that doesn’t just apply to your money, that applies to your time, your focus, your energy, your attention— anything in your life that is a scarce or limited resource that you need to manage or budget. That leads to two questions: No. 1) what matters most to you?, and No. 2) how do you align your daily decision making in way that reflects that? Answering those two questions is a lifelong practice and that’s what this podcast is here to explore.” Sound familiar?

When it comes to draft picks, who should have the final call? Head coach, or owner? Ball boy? Random fan?

Economics explains this using the concept of “residual claimant“. I explain residual claimant by asking what residue is and hoping someone says something like “something left over” (the best example is the gunk left behind when you peel a sticker off). In economics, our “residual” is profit. Who claims the profit?

I also like to give the class the opportunity to talk about some of their employment experiences. At your nightmarish fast food job (my closest high school work experience was Quiznos), who makes the work shifts? Who hires and fires? Who sets the prices for things? Why them? Why not you?

As you go up the chain of command and figure out who has responsibility to make decisions and why, you realize something. Power to decide is not just conferred automatically with age, or intelligence, or experience, or college degrees. In a capitalist system, power to decide is bought. I’m paying you, and in return you follow the rules and do what I say. The residual claimant is responsible for the final profit or loss of the company, once all the contracts (rent, interest, wages) are fulfilled. This person is the only one whose self-interest lines up perfectly with the long-term success of the enterprise, so this person earns the right to make the final decisions.

Everyone has had a friend who gives them free food from their job, right? The self-interest of hourly workers is often at odds with the company itself. And this explains why it is common for middle manager types to have some sort of compensation for success under their watch, like stock options or bonuses. It’s all an attempt to get the individual employee’s self-interest aligned with the company’s, in the long run.

There is no one way to be a successful residual claimant, and people who are bad at it generally fail or have to learn how to get better. What it takes to succeed depends on the environment: who you hire, your competitors, the industry, even luck. Let’s bring this back around to the NFL. So, we’ve established that the owners have essentially purchased the consent of all the employees down the line. These owners have billions of dollars invested in the franchise; they have the most at stake.

Do owners overrule coaching staffs? Everyone has a different management style; a few are open about it. Here’s the big question: does the economic principle hold up? You would hope that word would spread about bad owners, and good coaches would shy away from them. Players wouldn’t sign with their teams in free agency. Fans would stop financially supporting them. In reality, this is only somewhat true.

Turns out millions and millions of dollars can be pretty persuasive to coaches and players… and in the end, sports franchises are just about the worst example to demonstrate the efficiency of capitalism and residual claimants. We have a bunch of bad owners for franchises that roll out mediocre teams year-after-year. Why? Well, the flaw in professional sports is that it’s possible for owners to rake in lucrative profits without their team being “successful”. Fans love their teams! Thus, the demand curve is inelastic, and people go to games and buy merchandise and watch hours of the combine and the draft, even if their team hasn’t made the postseason in 17 years (this is your year, Browns fans!). The New York Knickerbockers are the 5th-most valuable sports franchise in the world, at $4,000,000,000 (4B), and they haven’t won the championship since 1973 (or made the playoffs since 2013). James Dolan has run the Knicks since 1995. I am personally bitter at Stan Kroenke for uprooting the Rams from St. Louis; his net worth is $10,000,000,000 (10B). The Worst Sports Franchise Owner in North America Is in Ottawa.

Remember, the alignment of interests is always important, regardless of whether it’s friendship, family, or business. Unfortunately, the incentive structure is flawed when it comes to pro sports, because the interests of the fans—the customers—don’t necessarily align with the owner, the residual claimant. Normally, when customers are mistreated, they change their behavior, but with sports it’s different. Fan is short for “fanatic”. Fans make fun of others who shift loyalties, and fans endure decades of suffering as a badge of honor. Years of frustration and you keep coming back, hmm, what does that sound like? Oh, right, the DMV. Refer to my post on cartels and oligopolies for the full breakdown.

Here are the three lessons:

1. We are bad at making decisions, and central planning doesn’t make us better.
2. Residual claimants have the final say because they are responsible for the final profit or loss of the enterprise.
3. Professional sports franchises can act as monopolies and be profitable without being successful, if their fan base is big enough.