Compounding endowment effects when trading draft picks in the Australian Football League

Abstract

Endowment effect relates to a situation when decision makers are more likely to retain an object they own, than acquire the same object when they do not own it. Studies have often concluded that players recruited early on through drafts are more likely to be held in team rosters irrespective of their marginal utility. We tested the hypothesis wherein this effect would compound when the pick used to select a player is traded between teams. Using a sample of draftees selected between 2003 and 2016 in the Australian Football League, we created a proportional hazard model to predict the career longevity of a player with their drafting team and overall career. The results suggest each subsequent trade marginally reduced the exit of a player by a log normal rate of 0.269 in their career with the team that initially drafted them. The findings were attributed to the premium requested by the original team that is compounded with every exchange as the reference points used to determine value have also shifted with the trade.