Do Firms Maximize? Evidence from Professional Football

Romer, David

doi:10.1086/501171

Cited by 161 publications

(132 citation statements)

References 20 publications

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“…Such findings reveal only that physicians are human. 57 In fact, two of the teams that do well in our evaluation of draft trading (New England and Philadelphia) also try more fourth-down conversions than average, a smart strategy as judged by Romer (2006). 58 Of course it is possible to argue against this critique.…”

Section: Discussionmentioning

confidence: 99%

“…The 10 percent of people who can will end up in the jobs where it's required" (Sharla Stewart, 2005). Romer's (2006) insightful analysis of the decision about whether to punt or "go for it" on 4 th down suggests that NFL coaches are not members of Becker's elite 10 percent. Here we see whether market forces can help NFL owners and general managers to do better.…”

Section: Research Hypothesismentioning

confidence: 99%

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The Loser's Curse: Decision Making and Market Efficiency in the National Football League Draft

2013

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A question of increasing interest to researchers in a variety of fields is whether the biases found in judgment and decision-making research remain present in contexts in which experienced participants face strong economic incentives. To investigate this question, we analyze the decision making of National Football League teams during their annual player draft. This is a domain in which monetary stakes are exceedingly high and the opportunities for learning are rich. It is also a domain in which multiple psychological factors suggest that teams may overvalue the chance to pick early in the draft. Using archival data on draft-day trades, player performance, and compensation, we compare the market value of draft picks with the surplus value to teams provided by the drafted players. We find that top draft picks are significantly overvalued in a manner that is inconsistent with rational expectations and efficient markets, and consistent with psychological research. Abstract A question of increasing interest to researchers in a variety of fields is whether the biases found in judgment and decision making research remain present in contexts in which experienced participants face strong economic incentives. To investigate this question, we analyze the decision making of National Football League teams during their annual player draft. This is a domain in which monetary stakes are exceedingly high and the opportunities for learning are rich. It is also a domain in which multiple psychological factors suggest teams may overvalue the chance to pick early in the draft. Using archival data on draft-day trades, player performance and compensation, we compare the market value of draft picks with the surplus value to teams provided by the drafted players. We find that top draft picks are significantly overvalued in a manner that is inconsistent with rational expectations and efficient markets and consistent with psychological research.We thank Marianne Bertrand, Jim Baron, Rodrigo Canales, Russ Fuller, Shane Frederick, Rob Gertner, Rick Larrick, Michael Lewis, Toby Moskowitz, Barry Nalebuff, Devin Pope, Olav Sorenson, David Robinson, Yuval Rottenstreich, Suzanne Shu, Jack Soll, George Wu, and workshop participants at Berkeley, Carnegie Mellon, Cornell, Duke, MIT, Penn, UCLA, UCSD, the University of Chicago and Yale, for valuable comments. We also thank Chad Reuter, Al Mannes and Wagish Bhartiya for very helpful research assistance. Comments are welcome. E-mail addresses: cade.massey@yale.edu, richard.thaler@gsb.uchicago.edu. . 2Two of the building blocks of modern neo-classical economics are rational expectations and market efficiency. Agents are assumed to make unbiased predictions about the future and markets are assumed to aggregate individual expectations into unbiased estimates of fundamental value. Tests of either of these concepts are often hindered by the lack of data. Although there are countless laboratory demonstrations of biased judgment and decision making (for recent compendiums see Thomas Gilovich et al.,...

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Section: Discussionmentioning

confidence: 99%

Section: Research Hypothesismentioning

confidence: 99%

The Loser's Curse: Decision Making and Market Efficiency in the National Football League Draft

2013

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“…For example, professional golfers, playing for large prizes in golf tournaments, show evidence of loss aversion (Pope & Schweitzer, 2011). Professional football coaches, when making decisions about whether to 'go for it' on fourth down, show similar behavior (Romer, 2006). In both cases, golfers (who seem more sensitive to going over par (bogey) than to being under par (birdie)) and football coaches (who avoid the risk of failing to get a first down even when that is, in expectation, the more attractive option), players with high stakes reveal the influence of risk aversion upon their choice behavior.…”

Section: Introductionmentioning

confidence: 99%

Three point shooting and efficient mixed strategies: A portfolio management approach

Fichman

O'Brien

2017

Journal of Sports Analytics

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Abstract. Using mean/variance investment theory, we identify the efficient mixed shot type strategy for National Basketball Association (NBA) teams. The proportion of 3-point shots in this mixed strategy closely tracks risk and the change in expected points from 1979-2014. We then extend this approach to an individual team level for both offense and defense. This measures both the risk associated with implementing a mixed strategy (for and against an individual team) and the implied shot type efficiency for offense and defense. It is the latter, shot type efficiency, which predicts winning and winning point differential.

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“…Thus, not surprisingly, a number of prominent findings in economics have been documented for the first time in sports settings. For instance, without attempting to be exhaustive, Ehrenberg and Bognano (1990) study incentive effects in golf tournaments, Szymanski (2000) studies discrimination using soccer data, Duggan and Levitt (2002) examines corruption in sumo wrestling, Garicano et al (2006) study social pressure as a determinant of corruption in a soccer setting, and Bhaskar (2009) and Romer (2006) study optimal decision making using cricket and football data.…”

Section: Introductionmentioning

confidence: 99%

Cognitive performance in competitive environments: Evidence from a natural experiment

González‐Díaz

Palacios‐Huerta

2016

Journal of Public Economics

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Competitive situations that involve cognitive performance are widespread in labor markets, schools, and organizations, including test taking, competition for promotion in firms, and others. This paper studies cognitive performance in a high-stakes competitive environment. The analysis takes advantage of a natural experiment which randomly allocates different emotional states across professional subjects competing in a cognitive task. The setting is a chess match where two players play an even number of chess games against each other alternating the color of the pieces. White pieces confer an advantage for winning a chess game and who starts the match with these pieces is randomly decided. We provide a theoretical model to guide the empirical analysis. The model shows that in this setting there is no rational reason why winning frequencies should be better than 50-50 in favor of the player drawing the white pieces in the first game. Yet, we find that observed frequencies are about 60-40. As predicted, we also find that psychological effects are stronger when the competing subjects are more similar in cognitive skills. We conclude that these elements affect cognitive performance in the face of experience, competition, and high stakes. * We thank

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Do Firms Maximize? Evidence from Professional Football

Cited by 161 publications

References 20 publications

The Loser's Curse: Decision Making and Market Efficiency in the National Football League Draft

The Loser's Curse: Decision Making and Market Efficiency in the National Football League Draft

Three point shooting and efficient mixed strategies: A portfolio management approach

Cognitive performance in competitive environments: Evidence from a natural experiment

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