When Dontonio Wingfield decided to leave the University of Cincinnati after his freshman year and enter the 1994 NBA draft, more than a few people told the former first-team high school All-American that he needed another year in college to ensure a spot in the first round and the guaranteed millions that come with it. Misleading advice from his agent, coupled with pressure to help his family, proved too much to resist.

“Being only 19 at the time I was naïve, and my agent told me exactly what I wanted to hear,” says Wingfield, 36, who runs an AAU-style mentoring program for youth from his hometown of Albany, Ga. “My mother worked three jobs to support my brothers and me, so my primary objective was to help her and my family. My agent put a letter in front of me and I signed it. It was a big mistake.”

Every year college players of varying levels face the same agonizing decision as Wingfield, who lost millions of dollars after not being selected until the second round of the draft (37^th overall) by Seattle where he would play only sparingly before being released by Portland in 1998. A new paper published by UVM business professors Michael Tomas and Barbara Arel in the Journal of Sports Economics titled “The NBA Draft: A Put Option Analogy” offers some potentially helpful information for players. In order to help decipher the wisdom of such a move, the professors have created a business model that utilizes option pricing theory and incorporates NBA labor statistics, mock drafts and takes into account the year a player is in college.  

 “Barbara and I talk about college basketball every year around the time of the NCAA tournament and thought it would be interesting to apply the put option model to the NBA labor market,” says Tomas, whose research focuses on the performance of futures and options exchanges, derivative security pricing and use, and fixed income markets. “Previous studies have focused on management’s perspective, but we didn’t find any from the perspective of the player. It provides data to back up the rule of thumb most agents seem to use that if players are projected to be drafted in the top 10, they should go."

Applying financial models to the sports world

Because the National Basketball Association has a fixed-salary schedule, Tomas and Arel were able to examine this particular labor market to understand the incentives for players to enter the draft. They surmised that early entry into the NBA draft is similar to the decision to exercise an American style put option -- a derivative contract between a seller and a buyer that provides the buyer with the right to sell a specific asset at a certain price within a certain time period. In other words, the decision to exercise a put option is essentially the equivalent of a draftee selling his remaining time in college early.

Using mock draft and actual draft data, they found “early exercise to be rational for all class ranks” if a player is reasonably confident he will be drafted among the top 10 players of the first round, although the early exercise boundary was found to be considerably different for freshmen and juniors. It becomes progressively tougher to ensure financial security (only first round draftees are awarded guaranteed contracts) after that point with slots 11 and 12 “not rational,” but safe in the sense that “not much money would be left on the table,” according to Tomas.

“The put option model is used a lot in the finance world, but it’s never been applied to sports economic literature,” says Arel, whose model also factors in a volatility rate and assigns stock prices to draft positions based on a salary scale.

A tool to help players in the decision-making process

Tomas and Arel aren’t under the impression that their paper is a going to dramatically change the way college players decide whether to enter the draft. Wingfield, whose chance to continue playing in the NBA was tragically ended by a near-death car accident in 1998, says the study contains helpful information for players, but questions whether he would have paid attention to it at age 19. “I’m not sure it would have mattered because nobody could have told me I wasn’t ready for the NBA at the time,” he admits, “but any information that helps the player is good.” 

Arel says Wingfield faced a tough decision because there’s a lot of variability after the lottery picks (the top 14 players) are selected. “There’s no way to know if you’re going to go in the first round or slip to the second round, so for a player like Wingfield, depending on the year, we would have told him to enter the draft only if he was going to be a lottery pick because otherwise staying in school has more value.”

It’s a rare case that a player from the America East Conference, in which UVM plays, faces an early entry decision. The University of Hartford’s Vin Baker could have gone pro after his junior year, but wisely waited and was selected No. 8 in the first round of the 1993 draft by the Milwaukee Bucks. UVM alum Marqus Blakely ’10 never seriously considered entering the NBA draft early, but was projected to be picked in the second round in some mock drafts after his senior year. Although he went undrafted, he signed a contract with the Houston Rockets to play in the last game of the 2010-2011 season and will get the chance to make the team next year as part of a non-guaranteed three-year contract agreement.

Tomas and Arel tested their option theory on college basketball standouts Kyle Singler and Gordon Hayward, who were weighing their options following the 2010 NCAA championship game. For Singler, a junior predicted to be selected in the late first or early second round, option theory indicated that there was value in returning to school. For Hayward, a sophomore projected to go in the 10-15 range, there was no option value in returning to school and waiting for another draft.  Both players reached the same conclusions as the option model suggested, with Singler deciding to withdraw from the draft and return to Duke while Hayward declared as an early entry candidate and was selected ninth overall by the Utah Jazz.

Tomas and Arel’s findings have implications for NBA draft policy. “To better align the incentives of draftees to NBA teams in the labor market, changes restricting the ability of players to enter the draft may be needed,” they conclude. “Our findings suggest restricting the ability of players to enter until the age of 20 or two years out of school is one viable option.” The other – an option they say is more attractive: adopt major league baseball’s model, in which players declare for the draft after high school or only after junior year in college. At that time, according to Tomas and Arel’s data, players “are not leaving any significant money on the table.”