A study titled "The Loser's Curse" by an economist from my alma mater looked at the market value of early draft picks in the NFL draft and found they were overvalued.

I wonder if the result would be the same in the baseball draft.

The study is pretty long and involved, but the core result is that in the NFL, predicting success is fraught with uncertainty and early picks get paid a lot more than they tend to return, on average.

Are you surprised?

No, not surprised. Of course whether I am or not is irrelevant.

I am, however, interested in the result of the research. My background is in economics/finance, and I pay a good deal of attention to how markets price assets. If the market can be demonstrated to be mispricing certain classes of assets, then there is a great deal of money to be made exploiting it.

Moneyball's thesis was that the baseball free agent market systematically mispriced defensive skill relative to offensive abilities, and Oakland was the first to figure that out. They exploited this knowledge and became a perennial contender on a budget far below the big market teams.

The first few NFL teams that figure out that early draft choices are valued by the market far in excess of the actual return to the team that owns them will benefit from that knowledge by trading early picks for later ones.

My curiousity is whether the same is true of the baseball draft. My intuition says that it is even more true in baseball than football, but unless a serious study is done on baseball such as what these two economists did on football, it remains intuition.

So the question is: does the baseball draft overvalue early draft picks? The question actually does have important implications with regards to MLB teams' draft strategy.

For instance: let's say that the answer is yes, and Billy Beane is the first one to realize it. Wouldn't he then aggresively trade his first round picks for multiple later rounders? And after others caught on, we would see a shift in relative signing bonuses of first rounders compared to later rounds.

So, TRhit, whether I am surprised or not is really not the question. The questions are 1) is it true in the baseball draft, 2)if so, who will be the first to exploit it, and 3)what impact will it have on the relative pricing of signing bonuses?

quote:

Originally posted by Rob Kremer:
The questions are 1) is it true in the baseball draft, 2)if so, who will be the first to exploit it, and 3)what impact will it have on the relative pricing of signing bonuses?

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You've identified a need, do the research, answer the hypothesis, and offer it as a published work.

I believe there is a relation to all personal services contracts where the projection of worth to value is similarly overpriced. Could we not say the same thing about the corporate exec recruitment packages that strain credulity when one considers that most tech stocks under the control of these execs, relative to performance relationship to market growth dynamics, are far above their worth to their value?

It's like signing a number one draft choice based upon the overhype of the marketing campaign and paying ten times his worth to his actual value.

It's like getting a thrower for ten times what a pitcher is worth when the actual value should be about the level of a utility infielder...because it's not a "real" pitcher.

Only in America...just a thought.

hmm, don't spend too much time on that study

baseball can't trade picks (yet anyway)

so lets say it was true that early picks were overvalued - and a team who was aware of that could take advantage?

that team's option would be to select lesser valued (skilled) players early - those players then would become more valuable by virtue of the early round they were selected in - so you're signing 10-15th round guys to 1-5th round slot money

and then in later rounds pick more lesser skilled players, because the top players would be off the board

I'm sure the other clubs would love to have someone "take agvantage" of them like that - or am I missing something

.

So...if I am reading this right. If as a rule early picks are not worth the money, then a team would do best to PASS on it's high picks and save the money. Maybe invite more players to camp. Correct?

Two questions for those smarter than me (everyone)....

First... Can teams pass on early draft picks the way that they are cuurently passing on late draft picks? Is it legal?

Second...Unless I am mistaken could this be a numbers thing. In 50 round only the first 5 rounds would be considered truely early right? Where the significant money is paid, right? That means if you compare late picks (46 in number to early picks (4 in number) by simply law of averages your likely to hit a gem or two late without spending the $ right?

Am I wrong?

I didn't know that trading draft picks was not allowed in MLB.

Anybody know why?

That certainly would make it harder to exploit an overpricing of early picks.

Observer - I think you are right about the law of averages comparing top 5 round picks to late rounds... but the study compared early first round picks to late first round.

I'm going to contact the author and see if they have looked at baseball's draft.

Article that answers Kremer's question:

I didn't know that trading draft picks was not allowed in MLB.

Anybody know why?
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http://espn.go.com/mlb/columns/schwarz_alan/1383197.html

RR

simply said--it because those are the rules they, MLB, chose to go by.

.

OH MY GOD...to save them from themselves!??

Maybe to save them from Billy Beane! Give him one more way to work the system and he'd really make a mockery of it.

TR

Your comment is true, but the question Kremer posed is why.

rr

I know my comment is true and it is also the reason why--they deemed it so--simple as that--they decided not to allow trades--since when did MLB need a reason for anything they do ?

observer, the teams cannot "pass" on a pick. The draft rules specify that as soon as a team passes, they are finished and cannot make more picks.
What you do see is teams sign a free agent that will cause them to lose higher picks. The Giants did that with Michael Tucker. Because of his status as a free agent, the Giant's lost their first round pick the following June. Sabean felt paying Tucker about what it would cost to sign a pick was better "value."

.

No, really, this is a section from the article...

quote:

It couldn't be that perfect.

It couldn't be that the only reason baseball teams aren't allowed to trade their amateur draft picks is that they don't trust themselves not to act like idiots.

And yet it is.

"Teams could be stupid and trade away all their picks. Yeah, we have to protect ourselves," one club executive said with an embarrassed laugh. "Is it really good to set up a system in baseball that rewards intelligence?"

To save them from themselves...good reasoning!

good conclusion tho

quote:

one forgotten point should take precedence, though: If a GM makes foolish decisions, perhaps his boss should hire someone who doesn't.

TR

So you say that the "outcome" is the same as the "reasoning that went into the "why" of it. I understand that the reasoning is "kneejerk-ism" but you're right when you say that the MLB is filled with kneejerkers.

Interesting logic though.

RR

Where did I use the term "kneejerk"?????--

You continue to take things and twist them your way for your minds benefit AND us words which you dont even spell correctly even though you are reading them from a book of words

You live in your little world and I will live in mine, I really think mine is larger than yours and without the prejudice you show--I dont know which is better but I am happy as a pig in your know what with my world--thus life goes on in this great country of ours which you seem to take to task every so often

Enjoy

TRhit said:

___they decided not to allow trades--since when did MLB need a reason for anything they do ?
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The implication here is that they reacted, rather than spend some length of time in doing several tasks that could have been interpreted to mean that they investigated the possibilities of considering it seriously or thoroughly.

In other words they could have done a indepth study using the models of the NFL, NBA, etc. and run a pilot of it for one season to see whether it could be done without to much dissention of disruption to the league...but they chose not to do anything like that and instead presented a position that essentially says they are prone to kneejerk-ism, which is my word and for them and has no validity to a real word.

But it does convey a guy with a knee that is not controllable when he gets a thought that sends him into apoplexy.

Since I have no knowledge of what you call your own world I will make no comment about it.

These kind of studies only look at on-field performance as the measure of a young player's worth. While this is very important, it's not the only thing. Early rounders are usually top-level athletes the public is willing to pay to watch play...especially if the youngster has a lot of "upside" potential. This may seem counterintuitive, but it's an economic reality.

This article is somewhat relevant:

http://www.perfectgame.org/2005/stories/04_08_05_hs_vs_col.cfm

We could say that all pro athletes are over valued when the minimum salary is more than many make in a year