What the markets expect in 2008by John Beamer
March 31, 2008
Using the word "markets" is fraught these days. What with the Dow Jones in a bit of a tail spin and the credit crunch causing house prices to fall at a record pace, who on earth wants to think (let alone read) about markets right now?
Hang on a minute ... in today's column I want to talk about prediction markets. For those of you new to this game read this primer that I put together last year. For those too lazy below is a paragraph explaining how prediction markets work.
Prediction markets are binary bets (yes/no) that allow participants to speculate on which team will win the division. The price of each team is an estimate of the probability of that team winning its division. The theory goes that this "wisdom of the crowds" effect should be superior to any forecasting system (although the data on that are a little mixed).
Today we'll look at each division and work out which team is the favorite. Over the course of the year we'll revisit the prediction markets to see what they have to say about the unfolding division races.
Before we leap into this it is, let's look at the THT projections that were released last week. The key column here is "div," as this is the probability of the team in question will win its division. For more information on how we arrived at these numbers please consult our Season Preview.
Team W L RS RA DIV WC American League East NYA08 93 69 949 818 46.5 24.5 Bos08 92 70 829 713 47.0 18.5 Tor08 86 76 779 745 4.5 24.5 Tam08 81 81 816 825 2.0 10.0 Bal08 66 96 752 901 0.0 0.0 Central Det08 90 72 849 756 62.0 3.5 Cle08 86 76 839 771 31.5 7.5 ChA08 75 87 803 872 3.0 0.0 Min08 74 88 724 791 3.5 1.0 KC08 73 89 781 864 0.0 1.0 West LAA08 90 72 813 719 75.0 4.0 Oak08 80 82 777 798 11.5 3.0 Sea08 79 83 718 752 11.5 1.5 Tex08 76 86 823 864 2.0 1.0 National League East NYN08 99 63 836 677 82.5 9.5 Phi08 89 73 900 808 13.0 40.0 Atl08 85 77 819 783 4.5 16.0 Was08 69 93 726 843 0.0 0.0 Flo08 62 100 703 873 0.0 0.0 Central Mil08 89 73 826 754 50.8 5.8 ChN08 86 76 814 756 30.8 6.3 StL08 81 81 782 795 15.0 0.0 Cin08 77 85 811 843 2.3 3.3 Hou08 73 89 740 833 1.0 2.0 Pit08 69 93 713 837 0.0 0.0 West SD08 90 72 763 685 59.0 6.0 LAN08 83 79 751 734 15.5 3.8 Ari08 81 81 737 724 12.5 3.3 Col08 81 81 824 804 12.0 3.8 SF08 75 87 666 732 1.0 0.0
The American League
Here are the prediction market estimates of how the AL will end up (all data courtesy of Tradesports).
AL EAST Win probability (%) Red Sox 50 Yankees 41 Blue Jays 6 Rays 3 Orioles 0 AL CENTRAL Tigers 51 Indians 37 White Sox 8 Twins 3 Royals 1 AL WEST Angels 66 Mariners 25 Athletics 6 Rangers 3
Despite not strengthening that much, the Red Sox are favorites to take the AL East. Interestingly the THT projections predict a bit of a tighter race, which is interesting given that both teams remain more or less unchanged since last year, although it must be said that the Yankees' 2007 performance was hampered by a quite dreadful start to the season.
The other three teams aren't really in it—and lets face it, it would be a major upset if neither Boston nor New York won. The question is when will one of the other teams contend for the division? If recent history is a guide we may have to wait quite some time to find out.
The AL Central is another two horse race, again between the Tigers and Indians. Here our projections are more in line with what the market thinks: Detroit are two to four win favorites, largely on the back of picking up Edgar Renteria, Miguel Cabrera and Dontrelle Willis. Given that the Tigers are throwing out long term deals at the moment and the Indians are a young team, this rivalry may be be with us for a while.
Without Johan Santana the Twins have very little hope of challenging for the division. Livian Hernandez, Santana's putative replacement, concedes about two runs per game more than the great man—that's about 10 additional losses right there. Also Francisco Liriano's (who is perhaps a more natural successor to Santana) spring training form hasn't reached the echelons we were seeing before his Tommy John surgery; in fact it was reported over the weekend that he'd begin the year in the minors. It promises to be a long, hard slog for Twins fans.
Oh, and how the Royals have even a one percent chance of winning the division is beyond me.
If any of the divisions on the junior circuit is a slam dunk, it is the AL West where the Angels are strong favorites (despite members of the rotation dropping like flies). Seattle's challenge looks even more forlorn with Adrian Beltre possibly starting the season on the DL. If King Felix and Erik Bedard can string together 25 win seasons then the M's are in with a shout, otherwise expect one way traffic.
The National League
Here are the prediction market estimates of how the NL will end up (all data courtesy of Tradesports).
NL EAST Win probability (%) Mets 62 Phillies 22 Braves 13 Nationals 2 Marlins 1 NL CENTRAL Cubs 49 Brewers 32 Reds 9 Astros 4 Cardinals 5 Pirates 1 NL WEST Diamondbacks 32 Dodgers 27 Rockies 21 Padres 19 Giants 1
The senior circuit was a lot more exciting than its younger cousin was last year. Will the same happen in 2008? Possibly.
The NL East, where the Phillies just pipped the Mets last year promises to be one way traffic this year. In fact if you believe the THT projections the Mets are expected to win 100 games. Okay, that's 99 games, not 100, but still, for a projection that is stratospheric (I can't remember the last time I saw a preseason projection that high). That feels far too heady for a team with a relatively weak rotation (with one exception), a fragile left fielder and a dodgy second bag man.
Remember the Mets have lost Glavine too and although he isn't the hurler of yesteryear he throws plenty of innings at a reasonable ERA—that has value. Don't get me wrong, the Mets are favorites for the division but are by no means the lock the THT numbers suggest.
The Central looks to be another two horse race between the Cubs and Brewers, with the THT numbers suggesting the Brewers have the slight edge, while the market is backing the Cubs. For no particular reason I probably favor the Cubs but if the young Brewers can produce and Ben Sheets remains healthy then it be a brave soul to bet against the Brew Crew.
The NL West is expected to be the most competitive division in the bigs. The market is expecting the Diamondbacks to repeat their 2007 success but only just—the Dodgers, Rockies and Padres are all in the mix.
Interestingly the THT numbers peg the Padres as favorites. Intuitively you might want to cast doubt on the legitimacy of the THT numbers but recall the D-backs' Pythag record from last year. Not even the addition of Dan Haren is enough to offset that! On this occasion I'd agree with the THT numbers but I wouldn't be surprised if the division race is a tiny bit closer.
2008 is set up to be a rip-roaring season. There is only one thing that is guaranteed and that is nothing is guaranteed. Whatever happens, come six months time at least some of these projections will look woefully foolish.
References and Resources
Thanks to Tradesports for prediction markets, and David Gassko and Chris Constancio for their hard work on the THT projections.
John is an unashamed glory supporter having followed the Atlanta Braves since 1991. He blogs the Braves at Chop-n-Change. He welcomes comments, criticisms and suggestions via e-mail