Modeling the Cost of High-Stakes Decisions: The Case of Brady v. Bellichick

Statistics Tutorial

Modeling the Cost of High-Stakes Decisions: The Case of Brady v. Bellichick

Intro

Statistical regression and probability analysis are quantitative business methods used to predict future outcomes based on past events. In contrast,economic opportunity cost tables quantify the impact of choosing a course of action before an event occurs.

This tutorial examines the recent conflict between New England Patriots head coach Bill Bellichick and team owner Robert Kraft over the decision to trade second string quarterback Jimmy Garapolo.

Sample Problem

In December of 2017, the New England Patriots football team faced a high-stakes decision concerning the starting quarterback position. Veteran quarterback Tom Brady is 40 years old, and backup quarterback Jimmy Garappolo is only 26.

Tom is a five-time Superbowl champion. He is universally regarded as the most accomplished quarterback currently playing, and arguably the best in NFL history. Bellichick drafted and groomed Jimmy to become Tom’s successor.

The succession plan ran smoothly until Brady announced his intention to play into his mid-forties. Until the end of 2017, it had been feasible to keep both players on the team because Garappolo earned $870,000 per year under his four year rookie contract.

Bellichick knew that the 2018 season would start with Jimmy as an unrestricted free agent. The restriction mandates Jimmy to remain with the Patriots if they pay the market salary for his player position. The Patriots right of first refusal is officially known as the “franchise tag”.

Under current market conditions, starting quarterbacks are scarce and back ups are plentiful.The prevailing franchise tag salary for starting quarterbacks is around $24 milion per year.

In contrast to the hefty franchise price tag, five-time Superbowl champ Tom Brady draws the league minimum guaranteed salary for players with 14 years or more of experience. This minimum guarantee is adjusted for inflation, and it is now approximately $1 million per year.

Most of Tom’s non-guaranteed compensation is variable; consisting o bonus payments and incentives. However Brady’s future performance is uncertain due to his advanced age. Very few players in his skill position play well after age 40, and none have played past age 43.

Bellichick and Robert Kraft bitterly disagreed over the quarterback decision. However, they operated under the assumption that both players could not be retained for the following season.

Bellichick wanted to retain Garapolo, but Kraft preferred to continue with Brady. In the end, Kraft ordered Bellick to trade Garappolo. This heavy-handed stance did not sit well with Bill Bellichick the GM. The decision veto bothered Bellichick so much,it rumors are swirling that he is taking his talents to another team.

It is common knowledge that Kraft has a close father-son type relationship with Tom Brady, and Bellick has no personal relationship with Brady. Sports commentators such as Shannon Sharpe have suggested that Kraft’s personal feelings about Tom Brady clouded his decision to trade Garapolo.

Solution

Patriots Opportunity Cost Table

Definitions

Economic Utility: The degree of satisfaction experienced upon obtaining an economic good or service

Marginal Utility: The degree of satisfaction that a party receives upon trading for an economic good or service; in today’s dollars, under current market conditions, at current market prices.

Analysis

The embedded economic opportunity cost table often referred to as a regret table, quantifies the marginal satisfaction or regret expected by Patriots owner Robert Kraft upon trading Jimmy Garappolo and retaining Tom Brady. The bottom line of the table includes a critical financial detail that is not considered or fully understood by sports analysts and commentators.

Tom Brady has been drawing the league minimum salary of $1,000,000 for at least 13 years. In order to lengthen Patriots future payments to him after retirement, Brady has a Deferred Compensation Plan with the Patriots. Deferred Comp Plans are presently unfunded liabilities owed to another party, who is due to be paid in the future.

This means that Brady has reduced his current cash claim on the team’s operating capital, in exchange for Mr. Kraft’s promise to pay out the liability on an annual installment basis for Tom’s lifetime, after Tom Brady retires.

The critical fact to comprehend, is that a player trade is a non-retirement separation event that triggers the duty to pay Tom’s account value in an immediate lump sum. The most conservative estimate of the total account value owed to Brady is between $200-$350 million.

I modeled the value of Tom Brady’s deferred account using a 5% rate of interest, on the Principal Financial deferred comp calculator.

Non-qualified Deferred Compensation Planner
Tom Brady: New England Patriots- NFL Franchise

Your planning inputs
Your age at plan start: 27
Your annual base salary: $1,000,000 your annual bonus: $14,000,000
100% of annual bonus to be deferred:
Receive deferred comp at age: 41
Receive 401k/Social Security benefits at age: 70; 85 % of income to replace with deferred comp plan: Employer contribution: 0

You were able to save $315,706,830 which equals an additional $11,281,678 in income per year.
We estimate your annual retirement income: $24,031,678

*This is an estimate modeled with the Principal Financial deferred compensation planner. (Public domain) 1/12/2018.

Robert Kraft is a businessman first and foremost. Keeping Garappolo in order to satisfy coach Bellichick’s team objectives costs $300 million. This is an economic catastrophe for Kraft. The only satisfactory decision at the margin, is to retain Brady until he retires. Tom Brady is a very clever employee. He will undoubtedly retire as a New England Patriot.

Conclusion

Viewed in light of an opportunity cost model,it is evident that Mr. Kraft made a calculated decision based on the marginal economic utility provided by each player.
The beauty of the opportunity cost/ regret table; it shows you the poor choice before a misstep is taken, and forecasts the optimum course of action. This is the power of economic analytics in the business of sports.



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