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Insurance policies and lottery tickets

Posted by Doug on July 10, 2007

On their face, the two items named in the title are almost identical. In both cases:

1. you pay a relatively small amount of money;

2. you might or might not receive an enormous amount of money at some point in the future;

3. the long term expected value of the investment is negative. In other words, it's not likely that you'll come out ahead on the deal.

So, aside from the fact that the expected value is probably a bit lower on most lotteries, why is an insurance policy considered a sound financial decision while the powerball-ticket-a-day plan is frowned upon? The answer has to do with what a mathematician might call independence of events. In the case of insurance, the receipt of the enormous sum of money is directly tied to some other random event, like your house burning down. If you never get that enormous sum, that just means you never needed it. With the lottery, on the other hand, the payoff is independent of the rest of the events that might impact your financial situation. If you spend your money on lottery tickets instead of insurance premiums, you might end up homeless, or you might end up with a lot of money that won't necessarily make your life any better.

This is why fantasy football owners of LaDainian Tomlinson will also be drafting Michael Turner this year, and overpaying for the privilege. And why that's OK.

If you have Tomlinson, then Turner is an insurance policy. If Turner finishes the year with 65 carries, who cares? That probably means Tomlinson stayed healthy and productive. If Turner rushes for 1200 yards, it's extremely likely that you will be in desperate need of those yards.

If you don't have Tomlinson, then Turner is a lottery ticket. Sure, the upside is that you get a 1200-yard back with your 9th round pick. But if so, you may not even have a place in your lineup for him. And the more likely scenario is that Turner finishes with fewer than 100 rushes and provides no help if and when your top back gets hurt.

This phenomenon has been well known among fantasy football players for a long time, and it even has a name: handcuffing. But I think the same philosophy, to a lesser extent, can be applied more broadly. For instance, I mentioned yesterday that I love the Laurence Maroney / Tom Brady combination this year because of its potential to deliver consistent weekly production. But there is another reason to like this combo: we know (inasmuch as we ever "know" anything) that the Patriots are going to score a ton of points. What we don't know is who is going to score them. I'm not sure I'd be very comfortable with Maroney at his current price --- there is too much of a risk of Belichick opting to really open up the passing game. For similar reasons, I'm not sure I'd be comfortable with Brady at his current price. But I would be comfortable with the pair for their combined price. I wrote something similar about Brandon Jacobs and Eli Manning last month.

In this article from last year, I wrote:

If I ended up drafting running backs, quarterbacks, and/or Antonio Gates in the first few rounds, I would not hesitate to draft both Rod Smith and Javon Walker and pencil them both in as every-week starters.

My footballguys and p-f-r blog colleague Chase subsequently blamed me for telling him to draft Rod Smith. But it's important to realize that I wasn't necessarily recommending Smith, nor was I recommending Walker. True, part of my recommendation was based on the week-to-week consistency I talked about yesterday, but part of it was also based on the handcuffy principles I'm talking about here. Smith turned out to be a wasted pick, but that must at least in part be tied to the fact that Walker was a bargain at his draft slot. It might have turned out the other way, for all I knew at the time, but I was pretty sure that the Denver WR group would produce at least one player --- and possibly two --- with big numbers.

I realize that that particular recommendation doesn't exactly represent a triumph of this mode of thought; it's just an illustration. And I need to give Chase a hard time.

I'll close with some speculation about same-NFL-team running back pairs. I have never run the numbers because I don't think there are enough numbers to run at this point, but my guess is that such pairs --- like Bush/McAllister and Jones/Barber --- show more week-to-week consistency than similar scoring pairs not from the same team. If that's true, then it makes those pairs attractive for two reasons: the consistency, and the handcuff. If you feel like having some fun this year, spend your first picks on Manning and/or Gates and/or stud wide receivers, and then roll with Marion Barber and Julius Jones as your every week starters. There is, of course, the possibility that one of those guys will get hurt or be relegated to a severely diminished role, but in that case, the other will likely outperform his draft position greatly. I'm not saying that's going to get you good production from the RB position, only that it is a very cheap way to guarantee yourself some minimal output at RB while you enjoy an advantage at the other positions.

This entry was posted on Tuesday, July 10th, 2007 at 4:18 am and is filed under Fantasy. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.