Friday, January 17, 2014

Are NBA coaches behavioral or neoclassical?

Snnk cost do not matter once spent. Yet, we just cannot help thinking that if we already paid so much for something, we should rather use it, even if it is inferior to something less expensive. With this reasoning, we deviate from neoclassical theory into behaviorial theory. Such attitudes are not well documented, and it is not quite evident how one would put together a dataset to study attitudes towards sunk costs.

Daniel Leeds, Michael Leeds and Akira Motomura found a way, and it is in front of everyone. Professional sports teams sometimes invest or commit considerable resources to recruit players, and a substantial amount can be considered sunk, as it is in the form of a signing bonus, guaranteed pay, or by using an early draft pick for new players. A neoclassical theorist would say that this sunk cost only allows the coach to expand his decision set, but who actually plays on the team should only depend on the players' current performance. This study shows that at least NBA coaches do follow this neoclassical thinking and are not more likely to let under-performing young player stay on the team if they were drafted in the early rounds. Indeed, the data focuses on players in the first five NBA seasons when they all have a uniform contract, thus only draft order should matter. However, there could have been a perfectly neoclassical justification for a bias on the part of the coaches: some players were drafter early because they have potential, and that potential is going to develop with playing time. If there is a puzzle it is thus rather why early draftees get so little playing time.

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