I’ve received a couple of questions asking about what the discount rate should be when trading future draft picks. For example, two years ago, Atlanta traded the 27th, 59th, and 124th picks in the 2011 draft, along with their first and fourth round picks in the 2012 draft, to the Browns to acquire the 6th pick and select Julio Jones. In making that trade, the Falcons were implying that the future picks were worth less than current selections. Can we quantify exactly what discount rate they used?
The Falcons went 13-3 in 2010, so they probably expected that they’d be picking pretty late in the first round of the 2012 draft, especially after adding Jones. No doubt part of the reason we see teams trading future picks is because teams expect those to be late future picks. Atlanta went 10-6 in 2011 (and lost their first playoff game), earning the 22nd pick in the 2012 draft. But let’s give Atlanta the biggest benefit of the doubt possible and say that we should assume that they were going to win the Super Bowl.
If you place picks 27, 59, and 124 into the Draft Pick Value Calculator, you see that they are worth 26.1 points. Unfortunately for Atlanta, that haul alone — without adding the future picks — is worth more than the value of the 6 pick (23.3 points). The Football Perspective chart is based on actual NFL production of drafted players, but I don’t argue that teams use my chart: just that they should. In reality, we know what chart they do use (at least as a starting point).
If we put Atlanta’s three 2011 picks sent to Cleveland into the Jimmy Johnson draft calculator, they convert to 1038 points, while the Browns’ 6 pick is worth 1600 points. That means the Browns needed 562 more points of value; if we give them Atlanta’s hypothetical picks 32 and 127 (the last pick of the 4th round) in 2011, they would be worth 635 points. Since the Falcons were 562 points behind and gave up 635 points of “future” value, we can conclude that the future picks were being valued at 88.5% of their actual value. In other words, Atlanta was taking 12.5% off the sticker price to get their player now.
Of course, in reality, the Falcons forfeited the 22nd and 118th picks in the 2012 draft, yielding 838 points of value. Therefore, they received only 67 cents on the dollar for those two picks in order to make the values equal (giving up 1,038 points in 2011 for 1600 points in 2011 means they would have needed to give up an additional 562 points of value to make the trade fair; 67% of 838 points equals 562.)
That’s just one example, of course. Last year, the Colts really wanted T.Y. Hilton, packaging their 97th pick and a 2013 fifth rounder to get the 92nd pick from San Francisco. The Jimmy Johnson chart says going up from pick 97 to 92 should cost you 20 points. Since the 49ers now hold the 157th pick in the 2013 draft (28.6 points), we can determine that the Colts accepted 70 cents on the dollar for their 2013 fifth rounder. What about the Mark Ingram trade? The Saints gave up the 56th pick in the 2011 draft (340 points) and their 2012 first round pick for the Patriots 28th pick (660 points). The Saints did well in 2011, so they “only” gave up the 27th pick in 2012 (680 points). But the discount rate there was still enormous, as the Saints received only 47% of the value on that pick.
The Al Davis Raiders weren’t paragons of rational trading. In 2011, they traded for New England’s 92nd pick (Joseph Barksdale) and the 125th pick (Taiwan Jones), picks worth 179 points under the Jimmy Johnson chart. In exchange, Oakland gave up a 7th round pick in that draft (Malcolm Williams, 3.8 points of value) and their second round pick in 2012. That turned out to be the 48th pick, meaning the Raiders marked that pick down from 420 points to 175 (42 cents on the dollar).
I don’t think there’s an established discount rates that teams use. I think most of us would argue that from the perspective of the fans and the franchise — as opposed to say, that of the general manager and/or coach on the hot seat — the discount rate in general is way too high. Since answers vary widely to the descriptive question of what the discount rate is, can we answer the normative question of what the discount rate should be?
It varies by team. The Patriots and Broncos have arguably the two best quarterbacks in the NFL, but they’re also the two oldest starting quarterbacks. If you’ve got Tom Brady and Peyton Manning, I think your discount rate should be relatively high. If you’re the Jets, the discount rate should be very low. And while bad teams should be extremely reluctant to give up their own future picks, one could argue that they shouldn’t need to accept much of a discount to acquire someone else’s future pick. If any team in the league offered their 2014 first round pick for the Eagles’ 35th pick in the draft, I would think Philadelphia should want to jump on that opportunity (in reality, they would probably get something like a 3rd round pick in 2013, too). To be sure, this is some time value to draft picks — and I argued that here — but the evidence indicates that on occasion, teams are willing to massively overpay for the right to pick immediately. Only for the very best teams would that make sense, but as you can probably imagine, the very best teams don’t tend to make irrational decisions very often.