Fantasy Football Trades & Behavioral Economics

It's August and the fantasy football season is upon us.  There are draft sheets to be built, preseason games to be watched, FFG podcasts to listen to, and research to be done.  It's a great time of year, and a reminder that, yes, life is good.  I look forward to draft day more than I do my birthday or Christmas.  Who needs gifts when you have beer & a room full of friends ready to ruthlessly insult every draft mistake?

Today's post is on one of the oddities of fantasy football:  trades, and why there are so few of them.

If you do not play fantasy football, here is a primer.  A group of ten or twelve people form a league, each pays an entry fee, and everyone drafts (or picks) from the list of all NFL players at each offensive position (quarterback, runningback, receiver, etc.) to make a team for each participant.  Each guy selects a group of "starters" from his team each week, and those players' statistics in that week's real NFL games each result in a certain number of points for that player.  The fantasy teams go head to head and the team with the most cumulative points wins that week.  Wins and losses are tallied, the league culminates in a single elimination playoff, with the winner getting most of the entry fees, and some money paying out to second & third place.

One aspect of fantasy football is the ability to trade players between teams.  It's a free market with only slight governance: usually a commissioner who will prevent unfair trades.  He's like the SEC of the fantasy football marketplace.  As teams almost always have an incentive to improve the weak spots of their teams, trades, in theory, should happen all the time.  Yet even with twelve different teams, you often can count the total number of trades, for an entire season, on one hand.

The Trade Scenario
Let's create a trade scenario to illustrate what might be working against an executed trade.  We have two teams, it is the beginning of week four, and both teams have suffered three losses to start the season at 0-3. Both teams are strong at one position, weak at another, and have an immediate need to improve their starting lineups.  For simplicity we'll only look at the positions being traded: wide receiver (WR) and runningback (RB), and each team can only start two of each. In this scenario, Team 1 is strong at runningback and weak at receiver; Team 2 is strong at receiver and weaker at runningback.  Assume that each player has relatively good depth at each position, and would not be hamstrung by the trade.  Also assume that each player's production in the first three weeks is completely in line with their draft position.

Team 1 (Average Draft Position, or ADP):
RB1: Alfred Morris (11)
RB2: Matt Forte (13)
RB3: Darren McFadden (30)
WR1: Dwayne Bowe (40)
WR2: Reggie Wayne (48)

Team 2:
RB1: Ray Rice (8)
WR1: AJ Green (14)
WR2: Randall Cobb (31)
WR3: Marques Colston (42)
RB2: Shane Vereen (64)

The trade proposed is:  Team 1 gains AJ Green, and Team 2 gains Matt Forte.  The trade would give Team 1 the following four starters: Alfred Morris, Darren McFadden, AJ Green, & Dewayne Bowe. Team 2 would then start Ray Rice, Matt Forte, Randall Cobb, & Marques Colston.

The trade would clearly benefit both teams, as the ADP of each team's two starting RBs & two starting WRs would improve.  Team 1's starters' ADP would move from 28 to 23.75.  Team 2's starters' ADP would move from 29.25 to 23.5.  The trade is about as fair as can be expected: the two players are as close together in average draft position as possible. And as each team needs a win desperately, it would make logical sense to accept the trade, as it's more advantageous at this point to have better starters at multiple positions than to have strong depth at a single position.

However, even though the trade would be mutually beneficial, there are a number of factors that work against the trade being accepted by the parties.

The Endowment Effect
This is a behavioral economics concept that describes how once an item is owned, the owner places a higher value upon it.  A famous example of Endowment Effect involved giving mugs to a group of participants in an experiment, and then offering them the chance to sell or to trade the mug for an equally priced item (a pen). Once given the mugs and the participants "owned" them, the price at which they valued the mug doubled. Before the experiment they might spend $5 on the mug; but after they owned the mug they wouldn't sell it for less than $10.

So, people value things more once they own them.  Each fantasy football owner therefore likely overvalues all the players he currently has on his team, simply by possessing them.  This is the reason so many owners love their teams right after drafting them.  But what drives this psychological quirk?

Loss Aversion and Reference Points
There are a couple concepts that factor into how we understand the Endowment Effect. The first is a reference point.  When you are offered a trade, the reference point is what you are comparing the offer to: it's the alternative.  The reference point is often your current position or the status quo.  In this scenario, let's assume the reference point for each team is:

Team 1: A team strong at runningback and weak at receiver
Team 2: A team strong at receiver and weak at runningback

Loss aversion is the idea that we feel losses more sharply than we do gains, relative to a reference point.  We see this sort of aversion all the time.  Losing a game feels worse than winning feels good, so to speak. Losing $10,000 in investments leaves a bigger & more lasting impression than gaining $10,000.  Mike McDermott can barely recall how he built his bankroll in Rounders, but he can't stop thinking about he lost it.  Let's Make a Deal contestants are unlikely to switch choices, even when the odds for staying put suck, for fear of losing what they might already have behind curtain number one.

How does loss aversion relate to this trade?  Even though AJ Green and Matt Forte are of equal value, for all intents and purposes, each owner will feel the loss of their current player more acutely than they will the gain of the new (and needed) player, with the reference point being their current team.  Even though the acquired player would be of more benefit to the team, the aversion to losing a player they already own weighs more heavily than the gain of a player who better helps the team.  As always, we are not so smart.

Summary and Application
This is a personal finance blog, so I probably should put some thought into how all this applies to our financial lives.

• First, it's helpful in any financial transaction to recognize that the seller is likely to overvalue the item, and the buyer is likely to overvalue the money he or she would give up.  Each party is probably subject to loss aversion. By recognizing the likelihood that biases are in play, you are in a better position to overcome them.
• If you are selling items you own, it is a good practice to ask others what it is worth prior to advertising the sale.  Recognize that their assessment is probably less biased than your own.
• Do not let the endowment effect lead you to the unnecessary hoarding of stuff, like owning way too many vehicles.  Some of the things you own and like are, unfortunately, worthless junk.  You are likely unaware of this, and might be better off simply purging things from your life regardless of what you feel for them.  You can always buy more crap later, if you miss it.
• And if you have a fantasy trade on the table, get an outside opinion before rejecting it.  

Thanks for reading, and good luck this season.

*Picture of throwback draft board, back in the good old days with LT going first, is from theogeo at Flickr Creative Commons.