After I posted my analysis of the Redskins’ trade for Robert Griffin III, a few readers asked how good Robert Griffin III would have to be if the Washington Redskins more properly valued their future draft picks. In my previous post, I used a discount rate of 173%, the discount rate calculated by Cade Massey and Richard Thaler, which is alarmingly high. Below, please find the highlights of how good RGIII would have be to make the trade even, given various discount rates.
These calculations differ slightly from my previous analysis because I made a relatively small mistake – I ended up double counting part of the value the Redskins traded away, which added to the value RGIII had to give to make the trade fair. As you can see, this difference mattered in the calculations, but not in the conclusion. Given a rational discount rate (let’s say below 10%), this trade comes out even only if RGIII is one of the best quarterbacks ever. Since this outcome is very unlikely, the Redskins almost certainly vastly overpaid for RGIII.
Very intesting work. This model looks great for evaluating the draft prior to 2011 but I think there are 2 major factors worth adding to your model: 1) The 2011 NFL Salary Cap, and 2) The CBA rookie wage scale limits. Correct me if I’m wrong, because I’m a Finance guy and it’s been a while since took economics, but artificial ceilings and floors will cause further scarcity and supply shortages and surpluses. In lieu of cash, teams will now need to barter with something else to move up in the draft, and that is more draft picks. But with the new rules, now we have a sort of “draft deflation”. A first round pick now comes at a steeper cash discount than it did a year ago, because there is a limit on what the team pays the rookie. I could easily argue that 2 first round picks in “2012 dollars” is now comparable in price to 1 in “2009 dollars”. For example, back when Sam Bradford was drafted, prior to these rules, his 6 year deal was worth between $78 and $86 Milion, with $50 Million guaranteed. Griffin’s deal will be about $40 Million over 5 years, by latest estimates. Luck’s will be a couple million higher. That’s…. about half…
With those factors, I think the models shifts quite a bit, and then the next step would be too look at how this affects how a team approaches the secondary market, i.e. free agency. Really, one would need to factor in the affects on both the Draft and Free Agency to get the real value of the entire team “portfolio”, and different “asset classes”. Any thoughts?
Hey Mark, thanks for your comment.
All great ideas – I took a look a the relative efficiency of draft picks earlier (http://harvardsportsanalysis.wordpress.com/2012/01/13/nfl-draft-efficiency-before-and-after-the-rookie-wage-scale/), and you’re right that early overall draft picks are much more efficient after the rookie wage scale. The idea that teams have to pay a premium for the new efficiency of these picks is interesting. However, since efficiency increases through the first two rounds, I don’t think that argument holds here. I think looking at the draft as a portfolio is the right way to view it – that’s where my analysis is heading.
Well, it looks like you are way ahead of me 🙂 I must missed that part of the analysis, so thanks for the reference. I will need to spend some more time reading and absorbing the concepts.