The Best Off-Season and Why Kirk Cousins is Rich
NFL Free Agency & The Winner’s Curse It’s NFL Free Agency time. The NFL has masterfully created a calendar that keeps the media and fans fixated almost year-round. Free Agency, The Combine, The Draft, Training Camp, Fantasy Football Drafts, etc. There is always something happening or about to happen for NFL fans, even when teams are not playing. Right now, we are in the middle of a critical part of the off-season – The Time of Hope. For fans, free agency is a time when optimism is created or a period where hope is destroyed. But if free agency doesn’t excite fans, there is always the next act. The draft is an opportunity to fix the failure to fix the roster in free agency. While teams have multiple opportunities to fill holes, these opportunities are different in critical respects. While free agents are proven and draft picks are unknown, the conventional wisdom is that it is best to build through the draft. In this case, the conventional wisdom is correct. And this wisdom has become more true over time. There is an interesting combination of market regulations and decision biases that back up the wisdom of building through the draft. The Problem with Free Agency There is an established concept in behavioral economics called “the winner’s curse.” The theory describes why auction winners often overpay for their prizes. In an auction for an asset, bidders are willing to pay just short of their expected value of the asset. If an energy company believes that an oil field is worth $10 million, it is likely willing to pay close to $10 million for the rights. Suppose there are 30 energy companies in the bidding for the oil field. Each company has different levels of forecasting ability and brings idiosyncratic biases to the evaluation. There may be 30 different valuations across the companies. Maybe the average or median evaluation is correct. A “wisdom of crowds” kind of perspective. Maybe the individual-level biases net out, and the average bid is the best estimate of the expected value. The “Winner’s Curse” reveals the problem with free agency. The company willing to pay the most frequently overestimates the value of the oilfield. And in sports, the team willing to pay the most player often overvalues the player. A counter-argument might be that different players have different values to different teams. Fair enough. Maybe a high-priced quarterback will be worth the premium because he extends the value produced by the team’s receivers. Maybe a rush linebacker creates disruption that increases the effectiveness of the defensive line. It is also reasonable to claim that winning leads to non-linear rewards in the NFL. Maybe a free agent is only worth an incremental win. The value of that win is very different if a team moves from 3 to 4 wins than if the change is from being a Wild Card team to a team with home-field advantage in the playoffs. Kirk Cousins and Comparables Based on salaries, the quarterback is the most important player on the field. Acquiring an elite, Super Bowl-caliber quarterback is the focus of any front-office that doesn’t have one. The fixation on elite QB talent leads to fascinating personnel decisions. In 2018, The Vikings gave Kirk Cousins a record-setting deal that included the most guaranteed money in NFL history. This signing is probably the best single-example case study for understanding the NFL labor market. Cousins was coming off a season where he won 7 games and had the 12th highest passer rating. Cousins’ contract made headlines for multiple reasons. It seemed outlandish that a QB that is seldom talked about as a top talent would become the player with the then most guaranteed money in league history. Sports Illustrated (and Forbes) summed up Cousin’s financial success: Vikings quarterback Kirk Cousins was the highest-paid player in the NFL over the last calendar year, according to Forbes. Not only that, but he ranks No. 9 on the list of the highest-paid athletes in the world during that time span, right behind Kevin Durant and Tiger Woods. From June 1, 2019, to June 1, 2020, Forbes estimates that Cousins made $60.5 million. Almost all of that comes from his on-field salary; Cousins made $58 million in salary with just $2.5 million in off-field endorsements. Each of the eight athletes above him on the list made at least $25 million in endorsements, with Roger Federer topping the list at $100 million. Cousin’s deal was also critical because NFL contracts tend to establish ranges for the next contract. Once a player like Cousins gets massive guaranteed money, the next player’s deal will start from what Cousins received. Cousin’s deal led to Mahome’s mega-deal, and Dak Prescott gets $160 million over 4. The quarterback market is subject to the winner’s curse, and each deal establishes a new baseline for the next deal. And now Dak Prescott is 20 plus percent of the Cowboy’s salary cap. Prescott’s deal may well workout. He may become the elite quarterback that returns the Cowboys to being a Super Bowl-caliber team. Or he may be a drag on the team’s salary cap for half a decade. The key to Cousins’ deal, and Prescott’s, is that these players are seen as having the potential to get to the promised land. Neither has achieved the ultimate success, but they have a chance. The winner takes all nature of the NFL may make the “winner’s curse” an even more significant threat in the NFL than in other contexts. A tradition of comparables sets an excessive floor on deals. The highest bidder nature of free agency further inflates the market. The importance of extreme success leads to significant risk-taking. The combined result of these factors can be middle-of-the-road teams devoting 20% of their salary caps to above-average quarterbacks. Market Inefficiencies The question in any free agency is whether the signing team has identified an undervalued asset. Does the team see something that competitors miss? Or is the player of particular value to one specific club? In the classic sports analytics story of Moneyball, the Oakland A’s were able to identify undervalued players. The simple version of the story is that the A’s identified a market inefficiency related to the value of players that reached 1st base through walks. The draft is probably the best avenue for obtaining undervalued assets. A perennial question in the NFL is whether teams should build through free agency or the draft. The conventional wisdom is to build through the draft and fill holes with free agency. The Collective Bargaining Agreement limits early career player’s salaries. In a salary-cap constrained league, this almost guarantees that players under rookie contracts are the only way to avoid overpaying consistently. At this moment, it appears that the Jet’s may be considering Zach Wilson with the second pick of the draft. Wilson would replace Sam Darnold, selected with the 3rd pick in the 2018 draft. Is there a significant difference in the talent levels between these two players? More information has been revealed about Darnold’s NFL abilities. Darnold may be viewed as having less upside. But Wilson probably comes with more uncertainty. Or maybe they are similar prospects. But Wilson represents a fresh start and a lower salary. In contrast, Dallas chose to go with the established player. A better upside? Probably. More expensive than a rookie? Incredibly. In the current and future NFL, analytics should be a risk management tool. With guaranteed contracts for veteran QBs, rookie salary scales, the high prevalence of injuries, and the uncertainty in forecasting the successful transition from college to pro, it is not just about maximizing talent. It is a complex risk and financial management problem. Our full discussion on the NFL offseason is now streaming on Apple Podcasts, Spotify, and Stitcher.