Hiring Lessons from the NFL Draft
A look at the National Football League's annual draft shows not only that there may be huge benefits from shopping in talent pools that get less attention, but also that hiring with your gut could be an expensive proposition.
By Peter Cappelli
As anyone with a television knows, the National Football League is an extraordinarily successful and ubiquitous business. Millions of dollars are spent by each of the 32 teams to win games, and a substantial part of that effort is spent on one event: the NFL draft. This is where teams decide which college players to pick to join their team and, in the process, how much to pay for them.
Is this like hiring workers for entry-level jobs? Yes, except for the fact that this market is about as perfect as one could ever get. Virtually everything about the players being drafted that could be measured has been measured, and that frequently includes IQ tests, interviews and, most importantly, exhaustive analyses of the best predictor of future success possible: how they performed previously playing the same game typically in the same position that they are expected to play in the NFL.
Football is obviously a business, so teams "win" not just by getting the best players but by doing so as cheaply as possible. Not only does that help them make money, but it helps them win by allowing them to get more, better players and still stay within their salary caps. All this means that there are big incentives and big efforts to pick candidates carefully. The data about how well draft picks have done in the past is also readily available. Every sports-radio talk-show host seems to have it at their fingertips.
So, how well do the teams do in picking talent? My colleague Cade Massey and his co-author Richard Thaler investigated to find out in a piece titled The Loser's Curse: Decision-Making & Market Efficiency in the National Football League Draft. The key outcome here is to what extent teams overpay for players. A player who doesn't work out is not such a disaster if they came cheap, but an expensive player who fails is a big mistake.
They note that the rankings of player quality that are built into the draft itself are not especially good predictors of success on the field. They point out that players picked in the first round have been more likely to never play at all than to make it to the Pro Bowl in the five years after they were selected. Players taken in the first round, on average, do turn out better than those taken in later rounds, but whether they are worth the additional price tag of the higher round is a different question.
What the authors find is that they are not. The result is based on a sophisticated calculation of the value of players with a given level of performance that is then applied to the draftees. Teams systematically have overpaid for top draft picks, by a large margin; and the worst pick -- in terms of value -- turns out to have been the No. 1 draft position. The best value comes further down in the draft, because even though quality declines as one moves down the round, pay declines even faster.
Why is it that, despite all these measures, despite all the attention and effort given to making good draft picks, and despite the fact that evidence on the value of draft picks after the fact was available for all teams to see, they continue to focus on top talent and overpay them? Clearly, they are overconfident about their ability to identify who is going to be good, and they don't rely on data to see if what they have been doing works. They may also appear to be dazzled by the hype around the top candidates.
The lessons from this exercise for hiring managers elsewhere include the reminder that value is what you want. It is easy to overpay for top talent, and there may be huge benefits from shopping in talent pools that get less attention. Use the data you already have to see how well your picks actually work out. Going with your gut may make you feel good, but it is a really costly way to operate.
Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at The Wharton School. His latest book is titled Why Good People Can't Get Jobs: The Skills Gap and What Companies Can Do About It.