The concept of Moral Hazard was drilled into my head in a couple of business classes.  In essence:  given an incentive to lose, you’re more likely to engage in losing behavior.  Say, for example, your insurance company will cover your expenses if you break a bone.  Who’s more likely to try a crazy stunt on a motorcycle [or something way cuter] – you, or your uninsured counterpart?

I liked this quote from Malcolm Gladwell (author of Blink, Outliers, and The Tipping Point) in his recent conversation with Bill Simmons (author of awesome sports stuff).

I think, for example, that the idea of ranking draft picks in reverse order of finish — as much as it sounds “fair” — does untold damage to the game. You simply cannot have a system that rewards anyone, ever, for losing. Economists worry about this all the time, when they talk about “moral hazard.” …

…No economist in his right mind would ever endorse the football and basketball drafts the way they are structured now. They are a moral hazard in spades. If you give me a lottery pick for being an atrocious GM, where’s my incentive not to be an atrocious GM?

I love applying scholastic concepts to real-world situations.  Good luck trying that with a communications degree or something.

Point is this – the draft lottery has a very real, and very adverse effect on all sports employing the system.  There’s a very real fear that the Washington Nationals with two of the best baseball prospects we’ve seen in decades, in Stephen Strasburg and Bryce Harper.  Who’s to say that the Islanders didn’t let goalie Rick DiPietro sit out a few extra weeks months to ensure a better chance at drafting John Tavares?  Lose games, win a prize.

How do you eliminate moral hazard?  It’s impossible to axe completely.  You want parity in the league, so you give bad teams a chance to catch up by giving them the best prospects.  Then, teams tank and are rewarded.  You can’t give middle-of-the-road teams an equal shot, because fringe teams with low championship hopes might just lose enough to pass whatever metric you place in front of them.  You can’t give everyone an equal shot for the risk of giving the Lakers or Penguins unrivaled access to lock down a premium contributor for the next decade.

I wonder, what if we eliminated the draft? You still have salary caps to control parity in the leagues (the MLB is an exception, but still – the baseball draft has enough stupid holes in it that it doesn’t matter.  The Yankees can’t sign 50 rounds worth of players).  The best upcoming stars go to the teams that are run well and have the most money available.  John Tavares doesn’t necessarily go to the Penguins because they’ve got a ton of their cap space locked away to pay for Malkin and Crosby.  The Islanders can pay him more.  Rotten or extraneous franchises with stupid management or unprofitable locations like the LA Clippers, Florida Marlins, and Phoenix Coyotes either move, fire the guy in charge, or die, because they aren’t consistently rewarded with an influx of incredible talent.

You get a new dynamic in the league:  the Penguins stand pat because their team is already loaded with talent.  Maybe the Islanders want to make a run and snag the five best prospects on the board (if they can – remember, there’s a salary cap).  You get upstart young teams with lots of potential, and give fans a lot to root for.  And what’s most important, nobody has an excuse for losing games.

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If you can’t tell, I’ve been watching a lot of sports (with ESPN.com open on my laptop) during my summer break.