Overconfidence vs. Market Efficiency in the National Football League

Cade Massey and Richard H. Thaler

No 11270, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A question of increasing interest to researchers in a variety of fields is whether the incentives and experience present in many "real world" settings mitigate judgment and decision-making biases. 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 incentives are exceedingly high and the opportunities for learning rich. It is also a domain in which multiple psychological factors suggest teams may overvalue the "right to choose" in the draft -- non-regressive predictions, overconfidence, the winner's curse and false consensus all suggest a bias in this direction. Using archival data on draft-day trades, player performance and compensation, we compare the market value of draft picks with the historical value of drafted players. 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.

JEL-codes: F21 J3 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2005-04
Note: AP CF LS
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