NBA 6950: Game Theory and Business Strategy
Game Theoretic Analysis of the number one draft pick in the NFL Draft
Every year the NFL holds an annual draft in which eligible athletes are selected by teams in a prearranged order based on the performance of the team in the prior year. The team with the worst record the prior year selects first and the team with the best record the prior year selects last. The draft itself has numerous rounds in which the teams select players to be added to their roster. Selection
Teams select players based on a combination of factors including team need, best player available and some teams may even factor in the reaction of the fan base into their selection. In many cases there is a clear number one and a group of potential number two players who are likely to be selected first. Widespread media coverage in the months leading up to the draft accurately predicts these picks. Players benefit from being selected high through their contracts with the team selecting them and through endorsement contracts. However, it is worthy to note that the media analysts tend to be less accurate as they predict later draft picks. As such, players in later rounds will often benefit from conversations with NFL teams to ensure that their professional valuation is in line with the analysts view. One NFL hopeful, Shyrone Stith, learned this lesson the hard way. In the 2000 draft, well renowned analyst Mel Kiper of ESPN predicted Stith would be selected at a respectable 46th, which would result in a substantial salary. He left school early, with hopes of NFL glory, only to wait for days until he was picked 243rd and received a position on the bench and the league’s minimum wage. One could speculate that if Stith had stayed in college he would have at least received a college diploma and had an opportunity to improve his draft position. This exemplifies the potential of misevaluating one’s relative skill and market demand. Contract Negotiation
Once selected, players, who often have an agent acting on their behalf, negotiate with the team which selected the player to come to terms on a contract. Players selected in the first five to ten picks are awarded multi-million dollar, multi-year contracts (see example below). * Complete contract information on top draft picks available in the appendix The major terms of contracts are largely dictated by the contract signed by the player drafted in the same position in the draft the prior year. Quarterbacks selected in the first five picks do appear to receive a premium over other picks which was clearly exhibited in the 2008 NFL Draft with Matt Ryan. The team holding the number one draft pick can negotiate with multiple players at the same time leading up to the draft. This team can actually sign a contract with a player before the draft occurs. It is important to note that in the NFL contracts rarely payout the topline or headline number. This analysis will focus on the guaranteed money component of the contract. Once selected players have the ability to hold out for more money and teams have the ability to refuse to sign a player and keep them off the field for a year. Game Model
The NFL draft is a multiple player, zero-sum game. We make the zero-sum claim by assuming that all participants are rational and that each player can add the same value regardless of which team he joins. With multiple players and multiple factors affecting rational decisions other than money alone, our analysis becomes quite complicated. Therefore, we define the players’ rationality as the individual pursuit of the largest guaranteed-money contract. For illustration purposes, we will first examine the “game” played in a two player, two team universe where one player is universally recognized as more valuable to either team. Players have the ability to negotiate with the team possessing the first pick and all negotiations...
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