Risk and Return in the NFL:Owens and the Cowboys

This isn’t an old maid’s portfolio we’re dealing with here.

That is how Dallas Cowboy’s owner, Jerry Jones, described their internal assessment of the expected risks and returns involved with signing Terrell Owens on the weekend. [Washington Post, reg. req’d].

Jones, the savvy NFL owner who has found more ways to circumvent the salary cap than there are galaxies, explained the risk-return trade-off so that even football mediots could understand it:

Jones said the Cowboys, after failing to reach the playoffs the past two seasons, believed that Owens’s gifts as a pass receiver made signing him worth the risks. He said there are risks in signing any player, and added: “That’s just life in this game. You take risks. This isn’t buying bonds.

In other words, Jones and Cowboys know full well that if the signing works out, they have a very good chance of making the playoffs and doing well financially. They also know that if the signing does not work out well, the team stands a good chance of having a losing season. The Cowboys are way out on the risk-return frontier [the Markowitz efficiency frontier] .

The sad thing is that most of the NFL mediots won’t get it. They don’t grasp the basic economics of risk and return trade-offs. If Owens works out well, for the Cowboys, the mediots will

1. Hail Jones as a genius, or
2. Condemn him as a lucky idiot.

and if the signing doesn’t work out, the mediots will

1. Condemn Jones as an idiot, or
2. Sympathize with him as an unlucky genius.

All four possible responses would be ex post assessments of the signing. As the mediots analyze this signing ex ante, as one must assess any decision when one makes it, we see the difficulty of assessing the signing of Owens. Jones’ statement reveals that he understands very well that this signing might not work out. Also, the structuring of the contract makes it clear that both sides understand the risks involved: there are large bonuses if it works and annual “outs” for the Cowboys if it doesn’t.

My own, ex ante assessment, is that this is a good gamble for the Cowboys to take. Parcells is a coach who probably has a better chance of working with Owens than many others, and Owens skills as a wide receiver are superb. I.e., my assessment is similar to that of Jones.

But we both might be wrong.

Cross-posted at The EclectEcon

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Author: John Palmer

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