Showing posts with label Moral Hazard. Show all posts
Showing posts with label Moral Hazard. Show all posts

Friday, May 15, 2009

The Moral Hazard


Pick any league in North American sport that has a draft.  The NBA, NFL, NHL, and MLB all have drafts.  This is the process where teams select players who aren't yet professionals and draft them to play for their team.  It is not a complicated process and as far as sports go it is not only the life stream of the game but it is also valuable entertainment to the fans.

Who doesn't love draft day?  It is a day that can give hope to any fan whether their team be a perennial powerhouse, a fringe contender, or a basement dweller who needs a chance.  On draft day anything can happen and it gives general managers and owners a way to rebuild not only their franchise but also the interest of their fan base.

While draft day does have its many benefits it also has one vital flaw.  Every draft day of the above mentioned sports is a day in which losing is rewarded and where the values of society are tossed out the window. 

What I am talking about is the system by which the team that finished last in the regular season gets the #1 overall pick.  Yes I know some leagues have lottery but the basic principle is still the same, the worse you do the greater your reward.

Imagine this system was adopted in other areas of society say for instance in the workplace.  When employers see someone working hard they promote that person as a way of rewarding their achievements.  What they don't do is find the guy who shows up late, leaves early, and doesn't get his work in on time and give him a company car and the corner office.  The very idea of rewarding someone for losing is laughable and yet it is commonplace in sports and likely always will be.

So by looking at the system in place if I took over the role of a GM in let's say the NBA and my team isn't very good and we are headed towards a lottery pick what incentive is there for me to try and make my team better?  Yes, I could trade players and try and sign guys in free agency, or I could tank the season and try and get the next LeBron James or Kobe Bryant.  Free agents cost a lot of money and if my team is untalented then executing trades will be difficult. It is much easier to select a college player and sign him to a rookie contract.

This argument is usually attacked by people saying that the reverse order draft is the ultimate leveler when really this is only a myth that is perpetuated by idiots.  If the reverse order draft is such a great system then why haven't the Pittsburgh Pirates won more than 80 games since 1993?   Or the Charlotte Bobcats made the playoffs in their 5 years as a franchise?  And why did it take the Columbus Blue Jackets 8 seasons to finally make the playoffs?

People tend to think that the more top draft picks a team gets the better it will become but that simply is not the case.  Success in sports is based on the quality of the organization.  The ability to hire good coaches and draft the right kind of players are what make the good teams good.

To prove this point look no further than the Detroit Red Wings.  Arguably the most dominant team of the past decade and a team that didn't have a 1st round draft pick from 2000-2007.  During this period they finished 1st in their division every single year and won 2 Stanley Cups.  They achieved this success not by getting lottery picks but by being an excellent organization that didn't use the draft as a crutch.

I think the solution to this problem is a simple one and a fair one at that.  Every team in the entire league should have an equal chance at the 1st overall pick.  Does this system make it more difficult for weaker teams to improve their chances to get better?  I don't think so.  I think that it would not only make the draft more interesting but eliminate the current incentive to fail.  GMs would have to be smarter and there could be no more tanking in order to get a better draft spot.

This system would make any league infinitely more interesting.  Imagine if Crosby and Ovechkin were on the same team.  Or LeBron and Kobe.  That would be amazing.  Yes it is awesome to see them go head to head and everything but the history that they could make playing on the same team would be even greater.

The Moral Hazard is the principle that that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.  In this case that a team would act much differently if drafts weren't reverse order.  Maybe if there was no incentive to come last we wouldn't see the same teams huddled in the basement of the standings every year.

The idea that someone is rewarded for failing or being inferior is a bizarre one that is only prominent in professional sports.  Yet it is contradictory to everything that I feel sports stands for.  The point of sports is to compete against an opponent and to beat that opponent.  If you lose the game there is no second prize there is only defeat.  The current draft system in the 4 major North American sports leagues needs an overhaul.  Teams need to stop losing every year in order to get great draft picks. 

In the immortal words of Herm Edwards, "You play to win the game!"

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