What the markets expect in 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.

THT forecasts

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.

Wrapping up

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 & Resources
Thanks to Tradesports for prediction markets, and David Gassko and Chris Constancio for their hard work on the THT projections.