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Beware of the Winners Curse

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Every year a number of NHL teams make big splashy singing on the first day of NHL Free Agency. Smart teams like the San Jose Sharks and Nashville Predators usually do nothing--and yet they compete for the playoffs every year. What is going on here? There are very few value (i.e. good bargain) contracts signed the first day. Cost efficient teams like the Sharks and Preds know this and obtain most of their talent through trades and the draft.

Why are there so few good UFA signings. Consider the "Winner's Paradox, wikipedia has a good explanation.

The winner of an auction is, of course, the bidder who submits the highest bid. Since the auctioned item is worth roughly the same to all bidders, they are distinguished only by their respective estimates. The winner, then, is the bidder making the highest estimate. If we assume that the average bid is accurate, then the highest bidder overestimates the item's value. Thus, the auction's winner is likely to overpay.

In plain English, if 10 teams are bidding on a player, the team that most values the player will win, and most of the time, the team that "most values" also "over values" that particular player.

The best bargain UFAs usually fall into three types 1) hometown discounts 2) Cup contender discounts 3) discounts to flawed or injured players and 4) inaccurately valued defensive players. Now the Thrashers have no shot at #2 sort of players right now. Last year they scooped up Maxim Afinogenov because of a disappointing injury plagued season. I suspect that a team could end up landing a flawed or discounted player like Demitra, O. Jokinen if they wait until other teams gorge themselves and blow their budget.