A look at the markets: The American League

The Internet must take credit for many innovations but perhaps one of the best is the creation of prediction markets. Prediction markets use “wisdom of the crowds” phenomenon to work out the probability of a given event happening.

For a primer of prediction markets click here. If you want to look at what the markets were expecting for the 2008 season click here.

For those of you who can’t be bothered to click either link (and I’m assuming that is most of you) here is a quick primer. Prediction markets exist in many guises but the ones we’re most into are the binary bet type. Binary bets have two outcomes: true or false.

Take a question such as, “Will the Yankees win the World Series?” This only has two outcomes (yes or no) and is a perfect example of a binary bet. Typically for a binary bet true = 100 and false = 0. The price mechanism is somewhere between these extremes and reflects the collective beliefs of the market over the likelihood of the bet in question being true. For instance if the price of the Yankees bet was 15, that would mean the market thinks there is a 15 percent chance the Yankees will win the World Series. If they do end up winning, the price will move up to 100 and the punter will win 85/15 times his original stake.

I’m sure you get the idea. Let’s have a look at what the prediction markets are saying about some American League teams.
Before we launch into this it is worth reminding yourself that we are not even a third of the way through the season. A lot can happen in a week of baseball, let alone 120-odd games!

AL East

TEAM        PRICE
Red Sox     61
Yankees     19
Blue Jays   5
Orioles     1
Rays        14

You’ll notice that the numbers in the table above add up to 100—that’s not a huge surprise as someone has to win the division. These numbers should “feel” right, and they do. If someone told you that the Red Sox had a 61 percent chance of winning the East you’d probably think that was about right. That the Yankees are thought to be their closest challengers is no surprise either.

What about the Rays, who at the time of writing are at the top of the division? Wouldn’t we expect their probability of taking the crown to be higher? If you dial back to what the markets thought before a ball had been pitched, Tampa Bay had a three percent chance of winning the AL East—and given their track record some considered that generous. Based on the talent expectations the Rays are playing better than expected; their pythag is also in positive territory—their record is one win better than expected.

However, the market does think the Rays have made some sort of breakthrough. The O’s are 2.5 games behind the Rays and the odds of their winning the division is a meager one percent. Ouch.

AL Central

TEAM        PRICE
Indians     58
Tigers      19
White Sox   13
Twins       8
Royals      2

This was billed as a two-horse race before the season began as the Tigers added Dontrelle Willis, Edgar Renteria and Miguel Cabrera to an already dominant line-up. A terrible April sees them bringing up the rear of the division some 6 games behind the Indians. Actually the Tigers are fortunate. To be only six games behind despite playing .318 ball is some achievement—the Indians haven’t exactly been lighting up the division you see.

Chicago and Minnesota are only half a game back but aren’t thought to be too much of a threat. The market clearly perceives that the two juggernauts are still the teams to beat. Given the depth of talent, that is probably right but Twins and White Sox fans will probably feel the respective probabilities of their team winning the division is a little low.

The Royals—despite playing close to .500 ball—don’t feature in the chase. Who says you can beat the market?

AL West

TEAM        PRICE
Angels      67
Mariners    3
Athletics   26
Rangers     4

Like the division, this table makes grim reading for Mariner fans. After the jaw-dropping acquisition of Erik Bedard for Adam Jones, George Sherrill and half of the M’s farm, the season has not gone to plan.

The Angels look strong with a 1.5-game lead over Oakland and a 3.5-game lead over Texas—the Mariners are an AL worst 8.5-games off the pace.

Despite the market believing Oakland has a chance, the AL West squarely feels like a one-horse race. The talent disparity between the Athletics and the Angels makes the Grand Canyon seem like a ditch. Pity the Rangers, though. The Texans are still in touch (3.5 games at this stage of the season is nothing) and the market believes they are as likely to win the division as Seattle. What with the Yankees bringing up the rear of the AL East, all of A-Rod’s former teams are in the doldrums—perhaps it is time to perpetuate yet another curse.

Wrapping up

The Angels, Indians and Red Sox are the current favorites for October ball. Deja vu anyone? Yup, that is the trio that made it to the postseason last time. Let’s hope when we look at the NL next week that league will be different. Given the standings, you’d think probably not.

References & Resources
Thanks to Tradesports for great market data!