Sunday, September 16, 2007

MLB Futures Bets Considerations: The Playoffs

One criticism of the MLB playoff structure is that the best team usually does not win the World Series. Even though baseball's regular season is nearly over and the football season is barely underway, WSEX currently gives New England's football team a better chance to win the title than its baseball team.

Some cynics even view the playoffs as an 8-team coin flipping contest, but this is clearly incorrect. The 2006 Cardinals had no business winning the World Series, but there is no way they were a mere 7-1 dog to do so; 20-1 might be a fair estimate.

The best way to handicap playoff futures is simply to handicap each individual game, but this is too hard or time-consuming for most bettors. What else can give you an edge? The previous two posts in this series include some tips. Here are some more:

- Handicap all the teams, not just one. If your estimated chances for each team to win the World Series add up to 120%, you're in trouble. Make sure your probabilities for each title sum up to exactly 1.00.

- Always anticipate upcoming opponents. If you're betting teams to win a pennant or the World Series, you need to know the probabilities that they will face certain teams and pitchers in their next playoff series before you can determine their chances of winning that series. This is similar to the process of estimating your equity against your opponent's hand range in poker.

- If you can accurately project the lines of upcoming games, compare the EVs between betting a futures line vs. betting each game individually. Often you will find a big disparity, especially if a bookie simply copies lines from someone else and doesn't update some numbers. If you're new to this essential process of estimating futures EV, I recommend King Yao's new book.

- As always, you want to bet against the public. If everyone is hyping a team that "can't lose," you may have a good bet. For example, last year all 19 of ESPN.com's pundits picked the Yankees to defeat the Tigers in the first round. This was symptomatic of a betting frenzy that moved the ALDS line at some books all the way to Yankees -400, a ludicrous number for any five-game baseball series.

- If one team is severely underrated by the oddsmakers, your best option is probably to bet them to win the World Series. This way you lock in an edge for all three rounds, before the oddsmakers can adjust their lines to new information.

For example, last year the Detroit Tigers, who had gone 19-31 in their final 50 regular season games, opened the playoffs at roughly these odds:

To win ALDS: 3-1
To win AL Pennant: 9-1
To win World Series: 20-1

I estimated that they would win the ALDS roughly 33% of the time, the ALCS (if they advanced) about 45%, and the WS 57%. Furthermore, I believed (correctly, as it turned out) that the oddsmakers would start taking Detroit seriously if they knocked off the Yankees. My estimated ROI on each line was:

ALDS: .33 * 4.00 = 1.32
AL: .33 * .45 * 10.00 = 1.485
WS: .33 * .45 * .57 * 21.00 = 1.778

As it turned out, I got lucky and the Tigers faced the best possible opponent in both the ALCS (A's) and WS (Cardinals). They opened at even money to win the ALCS and over 2-1 favorites to win the WS. A hedge at the start of the WS offered the equivalent of 13-1 on the Tigers to win the AL.

A less relevant but still instructive example comes from the 2006 World Baseball Classic. This tournament featured many games where one team was a very heavy favorite, along with several rematches. After seeing upsets by Korea and Canada against the heavily favored Japanese and Americans, the bettors and bookies combined to adjust the lines for future games, greatly reducing the payoffs on the underdogs. Bettors could see this impact by the moneylines; while Mexico was a 9-1 dog to the USA in the first round, they had moved to 6-1 in round 2.

Obviously, the bookies and public came into the WBC unprepared. Savvy handicappers had already taken advantage of this weakness by doing their homework in advance and fading the overrated Japan and USA teams early. By the time the championship game rolled around, the market had overcorrected, making Japan an underdog in the final match despite a superior lineup and Daisuke Matsuzaka.

Last example, I promise. Entering the season, everyone except a computer expected the White Sox to contend for a playoff spot. Now, they're a laughingstock, and their odds reflect it. You could have made a killing blindly betting against the Sox in May and June, but not anymore.

The message is clear: market inefficiencies usually move towards correction, not further from it. If you see an edge in the future, grab it now before the opportunity disappears.

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