THT Predictions vs. the Market

How great is it to finally have baseball back? Sure it might be a few degrees too cold in chilly Cleveland or murky Minneapolis, but that doesn’t matter if you are sat at home watching the game from the comfort of your living room.

No matter, the warm weather will be here soon enough and with it the first simmer of a pennant race. But which teams are most likely to contend and what are their odds of winning?

With the proliferation of the Internet every man and his wife can, and does, publish his view of which teams will make it to the October bun-fight. Indeed a few weeks ago I used the Hardball Times data to do just that (though, for the record, my wife was not consulted).

One thing you’ll notice in that article is I included a column that estimated the chance of each team winning their division and making the playoffs (note this calculation excludes the wild card race). What I want to do today is retrospectively compare our playoff odds to that predicted by the market on opening day. Also, I’ll look at how close the THT forecasts were to the opening day Las Vegas over/under lines.

The Market—How it Works

Despite the best efforts of the U.S. government to outlaw on-line gambling, prediction markets that allow the public to bet on the outcome of sporting events are still rife.

In a couple of weeks I’ll write a longer column on such markets, but for the time being all you need to know is that a prediction market works in a similar way to share trading on a stock exchange. Imagine there is a contract that pays out $100 if a particular team wins their division and pays out $0 if they don’t. If the market thinks that, say, the Boston Red Sox have a 45% chance of winning their division the contract price will be $45.

If, for some reason, the expectation that the Red Sox win their division increases (they may have swept the Yankees) then the market will bid the price up, say to $53. Traders who bought at $45 could sell for $8 profit. I’m sure you get the idea.

What this means for us is that we can get a market based view of who is most likely to win each division (subject to their being enough liquidity in the market, which there usually is, despite the best efforts of Congress). We can compare this to the estimated THT win probabilities to see if there are any glaring anomalies.

I realize I owe you an article on how I calculate the odds of a team winning their division (THT Win % in the tables below). Again, that is coming but the computation, although intricate, is easy to establish— it’s based on a ton of recursive probability.

The National League

Anyway, how do the THT playoff odds compare to the prediction markets (on Apr, 1, 2007) for the senior circuit.

Team           W      L       THT Win %    Market Win %
New York       85     77      36%          47%
Atlanta        82     80      24%          16%
Philadelphia   81     81      20%          28%
Florida        80     82      17%          8%
Washington     70     92      3%           2%

St Louis       85     77      37%          32%
Chicago        84     78      32%          32%
Milwaukee      78     84      13%          15%
Houston        75     87      8%           11%
Cincinnati     73     89      5%           7%
Pittsburgh     72     90      4%           2%

Arizona        86     76      34%          19%
San Francisco  83     79      22%          16%
Los Angeles    82     80      19%          36%
San Diego      80     82      14%          23%
Colorado       78     84      10%          8%

The market is a bit more black and white about the outcome of the NL East, expecting a more one-sided affair than we do (a scan down the Win % columns tells us that 47% is high). Although both the market and THT are confident that the Mets are division favorites, we’ve got the Braves as closest challengers, while the market shoots for the Phillies. Among contenders, the Braves and Phillies have more question marks about them than most, meaning there is quite a wide band of realistic outcomes. For instance, if the Braves’ starting pitching remains healthy then they should win a lot of games and challenge for the NL East pennant. Our depth charts are optimistic—but the market doesn’t think this will happen.

At first glance it looks as though the market is less certain on the outcome of the Central than we are, but in fact that is largely an illusion. We have St. Louis winning only one more game than the Cubs, whereas the market thinks it will be a dead heat (this accounts for the 5% difference in THT Win %). Winning odds for the other teams are within a few of percent of each other, which indicates that the THT projections and the markets largely agree on both the final order and number of wins. The insight here is that even a small difference in the number of wins can result in reasonably significant changes in win expectancy.

Zipping over to the West we see the biggest divergence between THT and the market. We peg the Snakes as likely winners in what is a closely contested division. Their combination of young arms and bats with some established pitching in Brandon Webb and Randy Johnson make them the favorites by our numbers. In fact Baseball Prospectus also expects the Diamondbacks to win the division, and although other systems tend to favor the Padres, the market is definitely taking a contrarian position in picking the Dodgers.

This could be because traders are placing more weight on the recent history of the two teams, which has Arizona in perpetual rebuilding mode while the Dodgers are defending champs. Who knows? Two things are certain. One, both we and the market have the maximum winning percentage at 35%, which indicates another tight race; and two, Colorado likely won’t be in the mix come late September!

The American League

Let’s see how we do when it comes to the junior circuit.

Team          W       L       THT Win %   Market Win %
New York      95      67      53%         57%
Boston        91      71      32%         32%
Baltimore     82      80      8%          1%
Toronto       81      81      6%          13%
Tampa Bay     68      94      0%          0%

Minnesota     89      73      43%         24%
Cleveland     83      79      19%         24%
Chicago       83      79      19%         21%
Detroit       83      79      19%         30%
Kansas City   67      95      1%          2%

Los Angeles   88      74      43%         46%
Oakland       85      77      29%         29%
Seattle       82      80      18%         8%
Texas         78      84      10%         15%

Look at that! The market thinks we’ve called the East just about spot on! Okay, so we’re a lot more bullish about the Orioles than the market is, but I’ve always said that our numbers for Baltimore are, if anything, a touch lofty. Saying that, the O’s have beefed up their pitching and if Mazzone can work his Atlantan magic a target of .500 could be in reach. Maybe I’m just trying to talk myself into the projection but at least I can take solace in that at least one non O’s fan believes me!. Oh, and ZiPS has them at 79 wins too. Saying all that the O’s haven’t had baseball’s greatest start.

Surprisingly, in the AL Central, the market has Detroit as favorites, although the close clustering of the Indians, Twins, Tigers and White Sox reveals that there is a lot of uncertainty as to precisely which team are champions elect—remember the NL central showed that one win between the top two contenders can result in a win expectancy gap of around 5-6%. Indeed, when I did the THT predictions this division was the one that generated the most hate mail, largely because our numbers suggest that the Twins will best the Indians. The market thinks that particular race will be a dead heat but still has Cleveland firmly in the number two spot.

I’ve got to confess that in the original depth charts I made a slight boo-boo on the AL West standings. I missed off the LA Angels’ second baseman! Add in the extra wins that generates and our revised AL West standings have the Halos a couple of games clear of Oakland. Remarkably this brings us in-line with market expectations as to the destination of the division. However, we differ from the market on the positioning of Texas and Seattle. If King Felix has a monster year (his first start was very promising) and the bullpen holds steady I’m more inclined to think that the Mariners could throw a surprise in 2007.

Over/Under

I want to wrap up by looking at the Vegas over/unders for each major league team. These odds are set by Vegas bookmakers and reflect both the bookmaker’s expectation of who will win and where the money goes. In other words if a flood of money goes on, say, the Blue Jays to win the AL East, Vegas will adjust the odds to make sure it still makes a profit if that outcome happens. Saying that, the over/under line is designed to take advantage of the unsuspecting public, so you tend to see more bullish lines on the more popular (ie, more frequently bet on) teams. On the flip side, unfashionable teams can be fairly cheap—if you know what you are doing it is possible to bring home some loot.

I’m not going to spend too long analyzing the lines largely because Patrick Sullivan from Baseball Analysts stole my idea— who knows, perhaps it was his idea first! However, I’ll give you my two cents worth of where I think Vegas has got it wrong.

Here are the over/unders for major league teams:

Team                     Vegas     THT     Difference
Los Angeles Dodgers      91        82      9
Philadelphia Phillies    89        81      8
Toronto Blue Jays        87        81      6
Detroit Tigers           89        83      6
New York Mets            90.5      85      5.5
Milwaukee Brewers        83        78      5
Chicago White Sox        88        83      5
Houston Astros           78        75      3
San Diego Padres         83        80      3
Atlanta Braves           85        82      3
New York Yankees         97.5      95      2.5
Cleveland Indians        85        83      2
Oakland Athletics        87        85      2
Boston Red Sox           93        91      2
Los Angeles Angels       89.5      88      1.5
Cincinnati Reds          74        73      1
St. Louis Cardinals      86        85      1
Pittsburgh Pirates       72.5      72      0.5
Texas Rangers            78.5      78      0.5
Chicago Cubs             84.5      84      0.5
Seattle Mariners         81        82      -1
Kansas City Royals       65        67      -2
Colorado Rockies         75.5      78      -2.5
Tampa Bay Devil Rays     65        68      -3
San Francisco Giants     79        83      -4
Florida Marlins          77.5      82      -4.5
Minnesota Twins          83.5      89      -5.5
Washington Nationals     64        70      -6
Baltimore Orioles        76        82      -6
Arizona Diamondbacks     77.5      86      -8.5

Money, Money, Money

There are four teams that I think Vegas may have got very wrong: Arizona Diamondbacks, Chicago White Sox, Los Angeles Dodgers and the Detroit Tigers. Let’s briefly take each in turn:

• Diamondbacks: As I said earlier, quite a few projections have the Diamondbacks winning the NL West. We do; PECOTA has them winning somewhere in the region of 90 games; the projection consensus as per the Replacement Level Yankees blog is 84 games. The Snakes should beat their over/under.

• White Sox: With ropey pitching and aging, fading sluggers some think that the White Sox could be a sub .500 team—crikey, PECOTA said 72 wins on its first try! We think they’ll keep their head above water (just) and win 83 games, and that is perhaps the most bullish projection around. 89 wins? No way.
• Tigers: Now, the Tigers are more likely to win 90 games than the White Sox are, that’s for sure. With a bevy of good, youngish pitchers (Kenny Rogers aside), a decent pen and the addition of Gary Sheffield’s bat to the lineup, there is a sense that the Tigers haven’t gone backwards this season. Saying that, there is a fear that they overreached their talent last season (the second half was mediocre at best). Our numbers say that Detroit is an 83 win team this year. Vegas is pricing in a bit of last year’s luck.
• Dodgers: Get real. 91 wins? It’s almost worth hopping on a plane with a truck load of cash in person. There is no doubt that the NL West is an open division with a number of contenders of which the Dodgers are one. Vegas has the Red Sox as only three wins better (albeit in a tougher division/league). THT has them sub-80 wins. They’ll contend for their division but I’d be very surprised if they got near 90 wins.

There is another neat take on the over/under line from our pals at Tradesports that puts a market around each over/under. It’ll be interesting to see how these change as the season progresses.

Wrapping Up

Looking at what the markets think when determining likely division outcomes is valuable as it adds a wisdom of the crowd element—especially when looking at pure prediction markets rather than the Vegas over/under. In combination with forecasts (like THT’s) we can get a better picture of the state of the likely contenders than we could using either the prediction market or the forecasts alone.

Coming up I’ll expound more about how prediction markets work, and how in-game markets proxy win expectancy. Also, every so often we’ll check back in and look at what the markets are saying about the division races.

References & Resources
Vegas over/under odds came from here. Tradesports is where I got prediction market data from. Also, I wouldn’t take too much notice of my betting tips—my money is staying firmly in my pocket. Oh, and a big thanks (again) to David and Chris for their projection.