A 2-point conversation
As tempting as it would be to claim a fourth consecutive correct Super Bowl forecast, we have a fiduciary duty to report the truth. While our model indeed tabbed the Los Angeles Rams to beat the Cincinnati Bengals, they needed to win by 2 more points than they did for our forecast to be correct. The fact is, the Rams’ 3-point victory needed to be a 5-point victory, so we find ourselves picking up the pieces to start a new winning streak in lieu of extending the previous streak to five.
This year’s Super Bowl features the Philadelphia Eagles against the Kansas City Chiefs in Glendale, Arizona—the first pairing of two #1 seeds since this same Eagles franchise met and conquered the New England Patriots five years ago by way of the ubiquitous “Philly Special” trick play. Which Kelce brother will hoist the Lombardi Trophy on February 12? We’re hoping to help answer that question in the following analysis.
For 20 years running, we’ve been shamelessly peddling our quantitative investment take on the 32 teams that make up the NFL, henceforth referred to as “NFL Alphas.” These NFL Alphas are structurally similar to an alpha that one might compute for a security in that they represent an asset’s (team’s) performance relative to market (wagering) expectations.
To help illustrate this concept and stay on brand with the gambling theme, let’s take a look at the 2022 season for the Las Vegas Raiders. We’ll assume that for each of the Raiders’ 17 games in 2022, a hypothetical bettor placed a $100 wager on the “money line” for the Raiders to win. For every game the Raiders lost, the bettor would lose $100. If they won, the bettor would collect back the $100 for that game, plus an additional sum based on the team’s win probability per market expectations.
After the bettor’s results for all 17 games were calculated, we added up all of the bettor’s winnings and compared that dollar amount with the $1,700 total hypothetically wagered throughout the season. Anything less than $1,700 implies a negative Alpha, and anything greater is a positive Alpha. For 2022, applying this process to the Raiders’ results during the season would have delivered $1,164 to the bettor—a loss of $536, which computes as a -31.5% NFL Alpha (as shown in Table 1 for the Raiders’ 2022 Alpha). It turns out that actual Raiders investors may well have thrown their own $536 into a “Black Hole.”
Giant or mile-high expectations?
There’s no pair of teams that drive home the NFL Alpha concept of performance relative to expectations more than the New York Giants and the Denver Broncos. Both teams had first-year head coaches—Brian Daboll (Giants) and Nathaniel Hackett (Broncos)—but that’s where the similarities stop. The Broncos stacked their deck with the blockbuster signing of Russell Wilson, “Mr. Unlimited,” who was expected to lead them to double-digit wins. Meanwhile, the Giants were returning largely the same team that limped them to a league-worst 22-59 record over the previous five seasons. They failed to crack six wins in each year of that span and delivered a league-worst -33.9% NFL Alpha for the 2021 season.
In 2022, Daboll managed to make lemonade out of his fresh bag of lemons, leading his team to a 9-7-1 record and a league-best 38.5% NFL Alpha (Chart 1). The Broncos, however, suffered a much different fate. Despite the new talent and playoff expectations, they bungled their way to a 5-12 record and a league-worst -47.9% NFL Alpha. The team eventually cut bait with their shiny new head coach in December 2022, before the season ended, as Hackett had made it very clear that he couldn’t quite hack it yet at the head coach level.
At the risk of beating a dead horse, we’d like to highlight two more teams that defied expectations in their own ways. Despite having roughly the same overall record, the 9-8 Pittsburgh Steelers and the 8-9 Tampa Bay Buccaneers were two completely different investments when bettor expectations are considered. The Steelers faced tough AFC North competition with a rookie quarterback after scraping the remains of “Big Ben” (Roethlisberger) off the field at the end of the 2021 season. The bar was low, and the Steelers aptly hurdled it, returning a 32.6% NFL Alpha for those who dared to speculate (Chart 2). At the other end of the spectrum, the then un-retired (and now re-retired) Tom Brady surprised the world with his return to the Buccaneers. The GOAT was expected to dominate for a third consecutive year in an anemic NFC South, and the Buccaneers were favored to win 14 of their 17 games. But they failed to win even half of them, yet somehow slithered into the post-season before promptly folding to the Dallas Cowboys in the Wild Card Round. If you bet on Brady in 2022, you lost a quarter of your stack (-25.1% NFL Alpha).
Slow and steady wins the marketplace
Equity and fixed income investors alike were happy to see 2022 in the rearview mirror. A 60% stocks (S&P 500 Index)/40% bonds (Bloomberg U.S. Aggregate Bond Index) portfolio allocation returned cringeworthy results in the negative mid-teens—the worst we’ve seen since the 1930s.
Low-volatility strategies weathered the storm admirably, and low-risk stocks generally have outperformed their high-risk counterparts over time. We’ve applied this approach to American football to learn whether the trend can be shown to transcend security markets, and based on our results over time, the answer appears to be “yes.” We’ve found that, in general, less risky, lower-payout wagers on teams that are large favorites tend to outperform riskier bets placed on large-payout, heavy-underdog teams (commonly referred to as “lottery tickets”). This “Favorite-Longshot Bias” went in tandem alongside security markets in 2022, with the average heavy favorite returning 6.9% (Chart 3) as compared with longshots’ evisceration to the tune of an average -35.4% loss.
What have you won for me lately?
Ultimately, the crux of this piece circles back to our research showing that NFL teams tend to revert back to their average longer-term success ratios. In particular, teams that outperform expectations in one season tend to underperform expectations in the next (and vice versa). Brian Daboll’s resurgent Giants were a microcosm of this phenomenon in 2022.
To take this a step further, we’ve found this mean-reversion tendency to be apparent as soon as a season’s playoffs. In other words, teams with higher NFL Alphas often underperform expectations in the postseason, thus making the teams with the lower Alphas relatively undervalued and the better selection to cover the point spread.
For our approach thus far this postseason, results have literally been six of one, half a dozen of the other. The Wild Card, Divisional, and Conference playoff rounds have all been split down the middle, yielding us a 6-6 playoff record for 2022, as seen in Table 2—and now an overall record of 122-78 (61% correct).
Our 2022 postseason record is begrudgingly emblematic of our conviction in this year’s Super Bowl. While we expect the matchup in Glendale to be every bit as electric as the environment at hole 16 of the PGA Waste Management tournament underway next door in Scottsdale, we’re painfully split down the middle on this football game.
The Philadelphia Eagles (15.0% NFL Alpha) and the Kansas City Chiefs (16.0% NFL Alpha) seem to have been cut from the same cloth this season: identical records, identical seeding, near-identical expectations, and near-identical NFL Alphas. Never in our history of producing NFL Alphas have we seen an NFL Alpha spread this small in a Super Bowl matchup.
Nevertheless, at the time of this writing, the Eagles are 1.5-point favorites in Glendale. They also happen to be the lower-Alpha team in this matchup (barely), and therefore we’d argue that 1.5 points is too small in deference to our theory that lower-Alpha teams are undervalued in the postseason. We don’t think too much separates these teams and that it could very well come down to a single play as time expires. All we can do is hope that the Eagles have at least one more “Philly Special” hidden away for that moment.
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