Opinion and Investing Column

KIM: Is No. 1 NFL draft pick a franchise fix or fool's gold?

March 17, 2012

KimEven the most casual football fan knows the Indianapolis Colts “earned” the first pick in the upcoming NFL draft by having the worst record last season. With the Peyton Manning drama over, you also know that the Colts must use that pick on quarterback Andrew Luck from Stanford.

Most observers say selecting him is a “no brainer.” Or is it?

Hoosier natives Tobias Moskowitz and Jon Wertheim wrote “Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won” to challenge sports truisms through rigorous statistical study, and they convey their results in an entertaining, thought-provoking way.

Moskowitz, a finance professor at the University of Chicago, and Wertheim, a sports journalist, found the NFL draft in particular to be rife with destructive decision-making. Specifically, teams consistently place excessive value on high draft picks and routinely overpay, in terms of current and future picks, to move up the draft order.

Take 2004. The San Diego Chargers selected Eli Manning with the first pick. The New York Giants, also looking for a franchise-saving quarterback, had the fourth pick and had to weigh two trade options:

The Chargers offered to trade Manning if the Giants would draft Philip Rivers, the second-best quarterback in the draft, and then hand over Rivers and a third-round pick (No. 65 overall)—plus the team’s first- and fifth-round picks in the 2005 draft.

Alternatively, the Cleveland Browns offered the Giants the seventh pick in the 2004 draft plus the team’s second-round pick (No. 37 overall) to move up to the Giants’ slot. At seven, the Giants probably would have selected Ben Roethlisberger, the third-best quarterback that year.

The Giants accepted the Chargers’ deal, which implied that the team placed a higher value on Manning than a package including Roethlisberger plus four additional players (the three picks the Giants sent to the Chargers and the pick it would have received from the Browns).

The Pittsburgh Steelers used the 11th pick on Roethlisberger, who would go on to be named NFL Offensive Rookie of the Year and lead his team to three Super Bowls (winning two). In just his second season, he became the youngest Super Bowl-winning quarterback in NFL history, at age 23.

Eli Manning obviously also has had a stellar career, being named Super Bowl MVP twice. But the Giants paid a king’s ransom in terms of salary and draft picks—one of which ended up being the Chargers’ All-Pro linebacker Shawne Merriman.

Professors Richard Thaler (Chicago) and Cade Massey (Yale) studied the 13 drafts prior to 2004, tracking the subsequent performance of the players. Higher picks performed better than lower picks, on average, but not significantly better.

Surprisingly, the top-ranked player at a position performed better than the fourth-ranked player only 56 percent of the time. So the teams played a huge premium for only slightly better odds than a coin flip.

“Scorecasting” suggests the team with the top draft pick should consider trading it for multiple lower picks from a competitor desperate to move up. “For a franchise willing to ignore convention … the payoff can be huge,” the authors conclude.

Regarding Luck, Moskowitz says the chances that he’ll be “even half as good as [Peyton] Manning are very, very small.”

“Slow and steady wins the race” is a value investing mindset also applicable to building an NFL roster. Choose overlooked or undervalued prospects, not the Heisman Trophy winner or Facebook phenom. The strategy may seem dull, but it will increase your chances of winning Super Bowls and the long-term investing game.•

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Kim is the chief operating officer and chief compliance officer for Kirr Marbach & Co. LLC, an investment adviser based in Columbus, Ind. He can be reached at (812) 376-9444 or mickey@kirrmar.com.
 

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