The Big Takeaway
IRRATIONALLY EXUBERANT
But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?
-Alan Greenspan, "The Challenge of Central Banking in a Democratic Society"
If you asked all twelve owners in a league to estimate the chances of each team winning a championship, you would get twelve very different sets of estimates. Assuming each owner has decent numeracy, though, all twelve sets of estimates will share a common feature: each will sum to 100%.
This is basic probability. Each league awards one championship every year. There is a 100% chance that an individual team walks away with it; therefore, the individual odds of each particular team should add to 100%. Each set of estimates will be internally consistent- all of the estimates will make sense in relation to the others.
What if, however, you took those twelve sets of estimates and you added up each owner’s estimate of his own chances of winning a title. Since these estimates were produced by different owners, they would not be internally consistent. Instead, you would find they sum to a number substantially higher than 100%.
This, too, makes sense. It stands to reason that every owner in the league is among the highest on the players he or she owns; if not, he or she would trade that player away to another owner who valued him more. Therefore, all of the owners believe their teams are better than the general consensus would have them.
Even though this outcomes is expected and easily explainable, it is nonetheless a perfect example of irrational exuberance. The owners, collectively, are more excited about their individual prospects than they should be. And just as how irrational exuberance fuels bubbles and crashes in the financial markets, it leads to grossly mispriced assets and persistent inefficiencies in the fantasy market.
I wrote last year about the idea of “windows” in dynasty, and how teams should concentrate their production into competitive windows. The problem of thinking with windows is that it requires owners to make accurate evaluations of their own teams. If everyone overrates how much of a contender they are, then the market for assets to help contending teams will have too many participants, and the market for assets to help rebuilding teams will have too few.
From there, the laws of supply and demand kick in, and we see short-term assets being overpriced and long-term assets being underpriced.
RECOVERING OUR SENSES
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
-Charles Mackay, “Extraordinary Popular Delusions and the Madness of Crowds”
Savvy fantasy owners know what to do with overpriced assets. You sell them. Savvy fantasy owners know what to do with underpriced assets. You buy them. And when you combine the “sell high” and the “buy low” into one move, you compound your potential gains and start building the foundation of a true dynasty.
So if short-term assets are clearly overvalued, and long-term assets are clearly undervalued, and a simple thought experiment is all we need to prove this is true, why aren’t many owners taking advantage? It’s because “irrational exuberance” is not something that only affects our league mates. We are just as guilty of it as they are. If left to our own devices, we’ll be too bullish on our own championship prospects to countenance selling off productive short-term assets. (Likewise, owners overrate the rate at which early-season production translates into consistent production down the stretch.) Such trades are hard, which is why there is so much value to be found in them.
One of the keys to profiting from irrational exuberance is simply knowing the proper timing. It’s hard for teams to be irrationally exuberant about their championship odds once they’ve been mathematically eliminated. Early in the season, though, every team with a good record believes they’re truly good, while most teams with a bad record believe they’ve been merely unlucky. There are many 1-2 and 0-3 owners who can explain in great detail the bad breaks that led to their slow start. The number of 2-1 or 3-0 owners who will honestly say that they are lucky to have started well is much smaller.
This is why early in the season is the best time to capitalize on these types of trades. Several older, short-term assets are starting to distinguish themselves. The market of teams looking to add pieces is as full as it will be, as everyone is at worst one or two games out of the playoffs. Over the next few weeks, several opportunities to sell for a profit will undoubtedly present themselves.
Enough about the broad theory, what are some examples of “irrational exuberance” trades I would be trying to make right now? Rashad Jennings, Ahmad Bradshaw, and Darren Sproles are off to phenomenal starts; a month ago, no one in their right mind would have dreamed of giving a future 1st round pick for any of the three, but now with a bit of shopping they all could likely command that kind of return.
Fred Jackson isn’t starting quite as hot, but he’s a quality starter, and there are undoubtedly some RB-needy teams out there who would be willing to give a 2nd rounder for him. Steve Smith could likewise command similar. Perhaps Delanie Walker or Martellus Bennett could net a good draft pick or a quality prospect, too; many leagues don’t value tight ends, but I’d imagine there are plenty of Jason Witten owners who are starting to feel a bit antsy.
If you own any of these players, you’re probably relying on them on a weekly basis. The thought of trading them away and getting nothing in return for the rest of the season is undoubtedly painful. At the same time, your league mates are probably giddy about the prospect of landing one of these players without having to give up any production at all. When swallowing the bitter pill that these trades represent, remind yourself that your championship odds are not as good as you think, and that these players are not guaranteed to continue their hot starts. A month ago, any owners would be thrilled to get these kind of returns for any of these aging, non-cornerstone players.
Remember that feeling. The cure for irrational exuberance is a little bit of calculated pessimism.
Second Thoughts
Kirk Cousins should be the poster child for small sample sizes. On 48 pass attempts as a rookie, Cousins averaged 9.7 yards per attempt and posted a quarterback rating over 100. Suddenly, everyone was over the moon about him, considering him the best backup in the NFL and wondering if he might be traded by Washington for a high draft pick. On 155 pass attempts as a sophomore, Cousins was abysmal, averaging 5.5 yards per attempt and a quarterback rating under 60- numbers that were truly Gabbertian. Then, Kirk Cousins comes in in 2014 and puts up two good games against two bad defenses, one of which was entirely unprepared for him, and people are once again anointing him the savior of the franchise.
The truth is that no small sample ever paints as complete of a picture as the entire sample. Kirk Cousins isn’t the amazing quarterback he seemed to be in 2012 and 2014. He isn’t the awful quarterback he appeared to be in 2013. He’s somewhere in between. If your league mates are willing to overlook an established history of mediocrity in favor of one or two good games, that’s a good time to make a profit. Cousins’ performance against the Giants last night might have slammed that window shut, but he can serve as an abject lesson the next time we feel ourselves casting aside a player’s entire history in favor of his most recent game or two.
What to do with Larry Donnell? The Giants’ tight end has capped off a strong early performance with a spectacular 3-touchdown game on national television. Through four games he has 25/236/4 receiving, which is a fantastic start to a season. As proper Bayesians, we must keep in mind his history- a 26-year old 3rd-year undrafted free agent who has, to this point, done nothing. Sometimes these players become the next Julius Thomas. Other times, they become the next Dustin Keller (19/254/5 in the first four games of 2010), or Scott Chandler (12/175/4 in the first four games of 2012), or L.J. Smith (26/265/2 in the first four games of 2005), or Eric Johnson (28/298/1 in the first four games of 2004).
In short, while there is a lot of reason to be excited about Larry Donnell, we must not value him at his upside without accounting for his downside. Other tight ends have started hot and then faded. In fact, other New York tight ends have started hot and then faded. In 2012, Martellus Bennett averaged 5 receptions for 62 yards in his first three games, with three touchdowns over that span. The rest of the season, he averaged just 3 receptions for 34 yards with only two more touchdowns. Last year, Brandon Myers averaged 5 receptions for 58 yards in his first three games, and 2 receptions for 27 yards the rest of the way. Larry Donnell is an exciting prospect, but he is not a proven stud. After his huge game, I would be asking around my leagues looking to see if I could find someone who disagreed with me on that point.
Week 3 was apparently national “Turn to Your Rookie Quarterback” day, though it seems Cleveland did not get the memo. If you own Bortles or Bridgewater, expect in the short term for your young quarterbacks to look more like Derek Carr than the 2012 class of Luck, Wilson, and Griffin. Despite recent examples to the contrary, rookie production is relatively rare. If you don’t own Bortles or Bridgewater, their value is probably spiking right now, but midseason might be a good time to buy, especially if they struggle as expected.
I’m one of the biggest Jordan Reed fans around, but there’s no way to spin the emergence of Niles Paul as anything other than a negative. While I don’t view Paul as a threat to usurp Reed’s position on the depth chart, Jermaine Gresham and Brandon Pettigrew have shown that even mediocre competition at the position can hamstring a talented young tight end’s production.
Speaking of Reed, now’s a good time for a reminder that injured players like Marvin Jones, Tyler Eifert, Robert Griffin III, Ben Tate, Jordan Cameron, and Mark Ingram inch closer to return every week. If you want to buy them while the injury discount is in full effect, it’s best not to wait too long; if an owner has held him through the entire injury, he’ll likely be disinclined to sell as soon as the player is ready to return.