If we believe that decision-makers are loss averse (and until recently, that seemed reasonably clear), then one consequence of loss aversion is the endowment effect. The explanation is fairly simple. When people are loss averse, they value losses much greater than otherwise equivalent gains. Giving something up therefore makes people very unhappy, and so people prefer to hold onto the things that they have. That means that, when a person owns something, they have to be given much more to compensate them for giving it up than what they would have been willing to pay to get it in the first place.
With the NFL regular season starting later this week, I was interested to read this new article by Jeff Hobbs (Appalachian State University) and Vivek Singh (University of Michigan), published in the journal Economic Inquiry (open access), because it looked at the endowment effect in professional sports. Specifically, Hobbs and Singh investigate whether draft picks in the NBA, NFL, and NHL over the period from 1988 to 2017 demonstrate an endowment effect. Their data set includes nearly 17,000 draft picks. For a little more context for those unfamiliar with professional sports drafts, Hobbs and Singh explain that:
Every year, each of the major professional sports leagues in the United States holds what is known as its “entry draft.” During the entry draft the teams select, in inverse order of success from the previous season such that the worst teams get the first picks, amateur players with a view toward signing them to professional contracts. In most of these leagues, teams can trade draft picks (before they are used to select players) at least as freely as they can trade players who are already under contract.
So, teams are initially endowed with a certain number of draft picks. They can choose to keep those picks (which they can use to select young players who are eligible to be drafted), or they can trade picks to other teams (and those teams can use the picks instead). Teams trade picks for a variety of reasons, often trading picks for players. Teams can also trade picks that they themselves acquired in some other trade. However, the nature of the trade doesn't matter for Hobbs and Singh's analysis. They are only interested in whether teams are more or less likely to trade draft picks that they originally endowed with, than other draft picks.
To do this, they look at what happens after a pick is first traded. If there is an endowment effect, then the team that originally had the pick should be less willing to trade than a team that acquired the pick in a trade. They do this by comparing the proportion of times that a traded pick is 're-traded', compared with the pick just before or just after that pick in the draft order. They find that:
After we control for the frequency of selling, we find that non‐endowed picks for all three leagues combined were 12%-15% more likely to trade again than were their adjacent, endowed counterparts from the same point in time afterward. These results are statistically significant, but we notice some differences when we look at each league individually. Regardless of whether we attempt first to match the once‐traded pick with the pick directly below it or above it, the results for the NFL become insignificant. However, the results for the other two leagues remain significant in both a statistical and economic sense. In the NBA, the average once‐traded and non‐endowed pick is between 24.5% and 29.2% more likely to trade afterward than is its match. In the NHL, the once‐traded, non‐endowed pick is between 14.8% and 23.6% more likely to trade.
In other words, there is a substantial endowment effect for draft picks in the NBA and NHL, but it appears not for the NFL. However, Hobbs and Singh aren't willing to let the NFL off completely, noting in their conclusion that:
The relative rationality of the NFL documented here pertains only to the endowment effect with respect to the trading of draft picks; other studies have found examples of other irrationalities in professional football.
Fair enough, but it seems like a bit of a cheap shot. I'm sure there's a lot of other irrationalities in basketball and hockey as well. As one example, the endowment effect probably doesn't just play out in the draft. It is likely to be present when considering free agent players as well (as I noted in this 2017 post). The sabermetrics revolution may have increased the use of analytics in sports, but it doesn't appear to have eliminated quasi-rationality entirely.
Read more:
No comments:
Post a Comment