By year’s end, Laibson had worked out five times for a per-visit cost of $200. He acknowledges he was aware how quickly good intentions can be abandoned as he knew a 2005 study (DellaVigna, Malmendier) of gym membership in the Boston area.

That study compared attendance of 8,000 members in three gyms over three years. On average, members who choose a contract with a flat monthly fee of over $70 attend 4.8 times a month. This was a per-visit price of $17.

While this is pricey, it isn’t necessarily exorbitant. However, the twist was the fee comparison. All gyms offered a 10-visit pass at a cost of $10 a visit. On average, users paid $700 more during the course of their membership instead of opting for a per-pay rate. It is evidence, Laibson openly, but somewhat sheepishly admits, that “people have profound self-control problems. This is true when it comes to finance, food or sport.”

SPORTS IS WHERE HUMANITY LIKES to celebrate notions such as determination, physical excellence and victory against the odds. It is also a field where financial decision foibles are exposed. In 1973 (Slovic and Corrigan), it was shown that punters betting on horse racing grew in confidence as they received more information, although their accuracy remained the same.

More recently, Richard Thaler responded to a critique by Nobel Memorial Prize-winning economist Gary Becker by investigating the annual draft in the National Football League (NFL), the premier American football competition. In an article in the University of Chicago Magazine (February 2005), Becker said, “It doesn’t matter if 90% of people can’t do the complex analysis required to calculate probabilities. The 10% of people who can will end up in the jobs where it’s required.”

He was arguing that in a market context rationality cancels out individual psychology. This implies that when the right choice needs to be made when significant amounts of money are involved, the right people, such as bankers, mutual fund managers and CEOs, will deal with it. But, although empowered by huge amounts of information, do those faced with such decisions really make better choices?

American football combines superb athleticism with the mayhem and brute force normally associated with tank warfare. At its most elegant, such as when a quarterback makes a perfect pass, it can rival ballet in terms of grace, but what is happening back on the line is pure carnage.

Thaler, a founding father of behavioral finance and author of Nudge (with Cass Sunstein), is an avid NFL fan. In “The Loser’s Curse” (with Cade Massey, forthcoming in Management Science), he investigated if people make rational choices in this multi-billion-dollar industry when it comes to selecting draft picks and, second, if the notion of market efficiency holds true.

“We suspected that teams were falling prey to cognitive biases, including overconfidence, that led them to put too high a value on picking at the very top of the draft,” says Thaler of the study.

Under the NFL system, young players enter a draft and are picked by teams according to their estimated potential and needs of the team. The worst performing team in the previous season gets first pick, followed by the second-worst team and so on, through several rounds. Teams often trade picks, so it is possible to estimate the value teams put on choosing early.

“That price turns out to be very high,” says Thaler. “A team can trade the first pick for the eighth and ninth picks, or the last four picks of the first round. For these prices to be rational, the first player taken has to be much better than the eighth player since he also gets paid nearly twice as much.”

While performance relates to draft order, it is far less strong than prices imply. According to calculations based on 20 years of data, the most valuable picks in economic terms (picks that give teams the greatest “surplus value”) are actually in the second round, with the surplus value at its highest late in the first round and early in the second. This is where the teams will get the best players for their money.

“After looking at financial markets for 25 years, I have to say this is the biggest anomaly I have found anywhere,” says Thaler. “It is saying that I can trade the first round for four or more second-round picks each of which will be worth more than the first pick I gave up. That is huge, especially when you remember professor Becker’s claim that in a rational word, where money is at stake, the people in charge will get stuff right.”

Of course, this is something fans know, particularly those of the Oakland Raiders. In 2007, the club used their number one pick on JaMarcus Russell, who fell well short of expectations. San Francisco 49ers fans also know the feeling. In 2005, they had first pick and felt they needed a quarter-back. They narrowed their choices to Alex Smith and Aaron Rodgers, eventually settling on Smith. Smith has struggled for consistency, while Rodgers may be the best young quarterback of his era.

While the choice of Smith over Rodgers was a tough one that anyone could have gotten wrong, the 49ers’ real mistake was not trading away their first-round pick. As it turns out, Aaron Rodgers was selected at pick #24; by trading down, the team would very likely have been able to get one of the two quarterbacks, very possibly Rodgers, and another good player as well, such as DeMarcus Ware, who was pick #11. Ware has been described as “the most dynamic defender in the league right now,” (Sporting News, 2009).

EVEN IN THE NFL, where millions, and ultimately billions of dollars are at stake, people do not necessarily make better choices. Nor does it seem that markets are particularly efficient. Thaler believes that one important result from this study is the number 52. To get a sense of how hard it is to judge talent, he and Massey examined records of all players at a given position (for example, quarterback or linebacker). They then compared pairs of players taken consecutively, for example, the third and the fourth linebacker selected. They then asked, what percentage of the time does the player picked earlier turn out to be the better player?

If teams had a perfect ability to pick between two seemingly similar players, then they would get a selection right 100% of the time. So, the player at #4, for example, would always be better than pick #5. With no skill at all, then the figure would be 50%. When Thaler and Massey crunched the numbers, the result was 52%, slightly better than chance.

“The takeaway is the number 52 and that extends well beyond football,” concludes Thaler. “Remember, football teams have far more detailed information on prospective choices in their market than any one we are used to – and they still often get it wrong. For the rest of us, 52% can only be an aspirational figure for the choices we make. But, if we can only aspire to 52%, can we really justify paying someone two or three times more than their second choice?” Thaler argues. “This applies equally when it comes to selecting a CEO, a portfolio manager or even a university professor.”