The annual NFL draft starts on Thursday, April 26. Over the course of several days, NFL teams will select eligible players they believe will help them win games and ultimately land their franchise a Super Bowl victory.
Winners or not, draft picks often leave a legacy of their own. One famous trade occurred in 1999 when coach Mike Ditka traded every pick he had so that he could select Ricky Williams, valuing him as someone who could immediately help the team win in a big way. Unfortunately, his team struggled that year, and Ditka was fired. (In his defense, he had won a Super Bowl previously with another team and was great to watch throughout the rest of his career.)
In his book Misbehaving, behavioral economist Richard Thaler dedicates a chapter to the NFL draft and decision making. He notes five findings based on historic studies of the draft, which we find pretty interesting:
- Over confidence. People think their ability is greater than it really is.
- Extreme forecasts. People are too willing to say a player will be a superstar when reality says superstars do not come along very often.
- The winner’s curse. When many bidders compete for the same object, the “winner” is the one who most overvalues the object.
- The false consensus effect. People tend to think others share their same preferences.
- Present bias. The focus on winning now often creates the illusion that one player will immediately turn the entire franchise around or take it to the next level.
In the end, while many people will recognize the names of the players selected in the first round — likely the players who made names for themselves over their college careers — they may or may not be the players who ultimately help their teams reach the Super Bowl.
In many ways, these same observations can be found in the investment world. It is easy to become too focused on the now, but doing so could cause a misstep in your decision making — resulting in doing what appears to help in the short-term but actually hurts in the long-term.
As financial advisors, we are focused on and attentive to the present day but strive to build plans and portfolios that allow clients to achieve their long-term goals. Our process works to help ensure we do not get overconfident in any single asset class or position in our decision making. We work as a disciplined team in an effort to make sound decisions based on long-term goals. We prefer a conservative approach to our overall planning so that we can be prepared for unexpected events or opportunities. While we want to be very aware today, our planning provides both a near-term and long-term outlook. We want to help ensure today’s and tomorrow’s goals are taken into consideration, so we do not sacrifice one for the other.
That may very well mean we pass on adding the latest “hot” new company stock or category to our diversified portfolio if we feel it is overvalued or may be the victim of overly aggressive, often unrealistic projections. While some of those may end up winners, we prefer trying to increase our chances of success with deliberate decision making. This process has proven effective over time.
As a side note, Richard Thaler’s book also notes that their analysis over the course of an entire draft process shows a 52% chance that a player taken earlier will be better than one taken later. For first round players that same chance is 56% — not a major difference considering how much teams are willing to trade to get into the first round. As fans agonize over their beloved franchise that trades earlier picks for additional picks later on — when they see their personal favorite still available — over the long-term, much like investments, they may have a much better chance of smiling when their team hoists the Super Bowl trophy. I’m pulling for my team and wish you and yours the best of luck!