Does Baseball Predict Wall Street’s Fortunes?

(April 1, 2011) – An MIT professor with a passion for baseball has some bad news for Wall Street.

Two years ago, a study by Standard & Poor’s Capital IQ found that when the New York Yankees win the World Series, the S&P averages double-digit gains the following year. That held true last year, with the S&P climbing 15% after the Yankees beat the Philadelphia Phillies in the 2009 Series. Meanwhile, the Yankees’ fierce American League East rival – the Boston Red Sox – don’t have such a strong track record: after their 2007 World Series win, the market dropped a record 37% in 2008.

The Red Sox were a tough team to figure last year. Big free agent signings John Lackey and Mike Cameron were huge disappointments, while free agent third baseman Adrian Beltre was a surprising success. Young pitcher Clay Buchholz made the All-Star team, while repeat All Stars like Josh Beckett and Jonathan Papelbon underperformed. Even line-up stalwarts like former league MVP Dustin Pedroia and Kevin Youkilis spent half the year on the disabled list.

The Sox finished with just 89 wins, only the second time they’d won fewer than 90 games in the last nine seasons, coming in a disappointing third in the American League East and missing the playoffs altogether. But, at least one man seemed to have the team figured out: MIT Sloan School of Management professor Dmitris Bertsimas, whose analytic model picked the Sox to finish with 90 wins last year, just one off reality.

Which brings us to the 2011 season, which kicked off with a handful of games yesterday, and is getting fully underway today. The Red Sox were this off-season’s big spenders, signing outfield speedster Carl Crawford and trading for slugging first baseman Adrian Gonzalez, and bolstering a shaky bullpen. Meanwhile, the Yankees played it cool, losing Andy Pettite to retirement and picking up a handful of low-priced veteran pitchers like Freddy Garcia and “Big Time” Bartolo Colon.

The Red Sox moves and Yankees’ lackthereof didn’t escape Professor Bertsimas’ models this year, which projected the Red Sox to finish with a jaw-dropping 101 wins, the Yankees with a very respectable 93 victories. So, are we looking at another Red Sox World Series victory and historic economic meltdown? Well—even if we did leave aside the fact that this is all coincidental/correlational hogwash—not necessarily. Ninety-three wins is usually enough to make the playoffs as the Wild Card team (the Yankees took the Wild Card last year with 95 victories, the next closest team was the 89-win Red Sox). And because of the smaller sample size of playoff series, the Bertsimas model is almost powerless to predict playoff results.

“In a five game series, the worst team in baseball will still beat the best team in baseball 15% of the time,” Bertsimas said in a press release. “Analytical principles are very useful for getting a team to the playoffs, but they are much less helpful once the playoffs start because the level of randomness is much higher.” Or as analytically-inclined Oakland Athletics general manager Billy Beane famously told writer Michael Lewis, “My s**t doesn’t work in the playoffs.” (For aiCIO’s interview with Lewis, click here).

So, Wall Street is likely hoping that the Yankees’ predicted 93 wins will get them into the playoffs – and, if Bertsimas is to be believed, anything can happen from there, even a World Series Championship. Of course, the Red Sox will have different plans, and if they succeed and trends hold, look for a rocky 2012 in the markets. Of course, this is all completely coincidental – no one will be altering their portfolio equity weightings if the Red Sox falter – but as Opening Day commences, it’s fun to think it has more meaning than simply wins and loses.