Random Walk Part 1: A Random Walk Through the Fantasy Baseball Season

During my hour breaks at Border's, I've been plowing through Burton G. Malkiel's classic investment book, A Random Walk Down Wall Street. I asked my dad which business/money related book I should read, and this was what he suggested. It is a pretty famous book; it's in its ninth edition. Malkiel's argument is that the best investment strategy is to buy and hold a diversified portfolio. The book offers critiques of all other investment strategies, and gives some fairly easy to understand explanations of basic stock market concepts. The title comes from the theory that it is impossible to predict what will happen to a given stock in the future; its price will move like a drunkard stumbling through an open field. I highly recommend this book to anyone who wants a crash course in investing.

I bring this up because I think a lot of the ideas discussed in Random Walk are applicable to a certain extent to the sports games we play, such as fantasy baseball and March Madness pools. Today we'll look at how Random Walk might help us in our fantasy baseball drafts. Tomorrow we'll tie it back into the tournament. We're leaving basketball for a day, because my own draft for my uber-important league is Sunday, and I'm dedicating the rest of the week to the tourney.

Oh, and one other note; I haven't finished Random Walk. I'm only through 10 chapters out of 15. So for all I know I could end up like Kramer when he watched The Other Side of Darkness, changed his living so that he wouldn't be kept on life support if he went into a coma, then watched the last 90% of the movie and discovered the patient wakes up at the end of the movie. And generally speaking, I'm a novice with all this financial stuff, so I hope that my management school friends and banking relatives won't be too critical of my knowledge.

Is fantasy baseball a random walk? Baseball is far more predictable than the stock market, I should think. If there was an All-Star team for New York Stock Exchange every year, its roster would have far more turnover from year to year than baseball's All-Star teams. But like the stock market, in baseball there is foreseeable risk (injury prone players, aging players declining, and young players not making expected progress) and unforeseeable risk (randomly good or bad seasons and sudden injuries). If baseball was perfectly predictable, fantasy baseball would be no fun. So there is some element of a random walk to fantasy baseball.

The chapters that got me thinking about fantasy baseball were about volatility and risk. Naturally, the average investor feels like he should minimize risk as much as possible because he doesn't want to lose his money. Malkiel shows with some fancy statistics that it is worth taking on risk to a certain point because you'll get significantly better returns. For instance, even though foreign stocks tend to be much more volatile (high risk, high reward) than American stocks, you can theoretically lower your portfolio's overall risk by adding foreign stock, like so:


This idea can kinda be understood with a fantasy football metaphor. One possible strategy last season would be to draft both the steady Fred Taylor and feast or famine Maurice-Jones Drew, "handcuffing" the two together. If you played them both at once, you'd have all your bases covered. It's sorta/kinda/not really similar with international stock markets. American stock is Fred Taylor, and foreign stock is Mo-Jo Drew. A portfolio of 75% Fred, and 25% Mo-Jo, has the least amount of volatility (basically, risk), because you combine the steadiness of Fred with the benefit of Mo-Jo's explosiveness without getting hurt on those Sundays when Mo-Jo fails to reach the endzone. Or something like that.

What does this have to do with fantasy baseball? Well, I'll tell you! When I draft my team on Sunday, I'm going to be thinking about the riskiness of my picks. I'm not going to draft all safe, healthy veterans, nor am I going to draft a bunch of high upside prospects. That's pretty obvious, and that's something I've always done. What I haven't done is really paid attention to the mix of safe and risky picks I was assembling.

What level of mix should you aim for in your draft? As ESPN.com's Jason Grey says, "The amount of risk I am going to take in a draft is directly proportional to the depth of the free-agent pool." Last week I drafted my team for a 10-team AL-only league. Compared to my 10-team universal league, the free-agent pool in that league is much shallower. One of the moves I made after the draft was trading Delmon Young for Fausto Carmona and Frank Thomas. OK, so Delmon Young is the sexier pick. And there's a very good chance that Young outperforms Thomas this year. But what if Young puts up the numbers he did last year: 13HR, 10SB? The next guys on the wire at OF in that league are Rocco Baldelli, Coco Crisp, and Travis Buck. Thomas, platooning at utility with the rest of my bench, is a near lock to give me power here and there.

In my universal league on the other hand (which, by the way, has only two bench spots), Frank Thomas may not even be drafted. He'll be available to scoop up during the season if and when he gets hot.

It's common sense, but I don't think it's a conscious strategy for a lot of people. This year, I'm trying to make it one for me. On Sunday I'll grab a nice base of low risk guys then grab a bunch of high risk guys later in the draft. If they don't pan out, I'll make my money grinding it out on the waiver wire.

There's another chapter in Random Walk that can help in fantasy baseball: behavioral finance. In the 90s, economists finally started to listen to the suggestion from a couple of psychologists that investors did not behave rationally, as most analytical models assumed. Their studies suggested that phenomena like overconfidence, loss aversion, and herding were at conflict with rational investment. You can probably deduce what those terms mean in investment. For fantasy purposes, what we need to identify is ways that our opponents are likely to act irrationally. Really, that's a matter of personal strategy. Do you think paying for saves is irrational? Do you think its irrational to miss a chance to get a quality player in the shallower positions?

One bit of irrational behavior I'll be looking for is the overvaluing of young, high upside players. We would all love to be able to claim at the end of the season that we grabbed the sleeper of the draft. But if everyone is diving down to grab youth, that will leave the veterans undervalued. In combination with my strategy of building a nice base of low risk players, I hope to navigate the Random Walk that is the fantasy baseball season. (I also hope Chris doesn't read this, since he's in that league.)

Tomorrow we'll examine the random walk of the NCAA tournament and see if we can diversify our brackets to play just the right amount of risks.