Thaler On What Investors Can Learn From The NFL Draft

Richard Thaler is known for his pioneering research in the field of behavioral finance, and in a recent piece for Institutional Investor, Thaler explains how investors and NFL general managers can learn a lot from each other.

Thaler, who wrote the piece with Raife Giovinazzo, says that there is a similarity in a way that investors overvalue popular “glamour” stocks and the way that NFL GMs overvalue the most hyped prospects. Referring to a previous paper in which Thaler and Cade Massey examined mistakes that teams make the draft, Thaler and Giovinazzo write, “For investors, there are two big lessons. First, the best player does not necessarily make the best draft pick — just as the best company does not necessarily make the best stock to buy. On average the players taken with first-round picks do not provide teams as much value — performance relative to their cost — as players taken in later rounds. Value matters. Second, NFL general managers — like investors — pay too much for glamour and neglect duller, solid performers. Specifically, NFL general managers often overpay for early round draft picks, so they can draft an alluring star — just as many investors overpay for glamorous, fast-growing companies and neglect solid but less exciting ones.”


Whether or not you are running an NFL team, the investment implications of Thaler’s wide-ranging research are clear: Steer clear of those overhyped “first-round” stocks, and focus on value plays.