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What do the Betting Markets really say about the Leafs?

On Tuesday, I looked at some dire predictions for the Toronto Maple Leafs: they supposedly had just a 1.7% chance of making the playoffs, and a 1-in-125 chance of winning the Stanley Cup. I pulled up the Stanley Cup odds for the bottom seven teams in the league:

TEAM 10/1
Tampa Bay 100/1 75/1
Florida 30/1 75/1
Nashville 40/1 75/1
Atlanta 50/1 75/1
Minnesota 40/1 100/1
Toronto 60/1 125/1
N.Y. Islanders 100/1 150/1

The Leafs have played quite poorly, but their Stanley Cup odds have dropped because their odds of making the playoffs have dropped, not because they're perceived to be substantially worse than they were at the beginning of the season. Before the season started, the Leafs' upside appeared to be the 14th overall seed in the playoffs - last year, on the day the playoffs started, the 14th seed (Montreal) was given a 2.86% chance of winning the Cup.

If that 2.86% holds true for the Leafs should they make the playoffs, then the futures market gave Toronto a 58% chance of making the playoffs prior to the season and are still giving the Leafs a 28% chance of making the playoffs. (This implies that the Leafs are a .523 team, which is an overestimate.) This isn't a perfect futures market, and the people who set the lines hedge a bit so that they'll make money even if any unlikely outcome occurs (this hedge is known as the 'vig'.) If I remove the vig (as Tango suggests in the comments below), I get 39% and 17%, respectively. Are these gamblers nuts?! Didn't we just hear that the Leafs have a 1.7% chance of making the playoffs?

If I then back out these playoff probabilities by running a simulation of the entire season, this futures market projected the Leafs to be a .487 team at the beginning of October, and, after the first 18 dismal games, it projects the Leafs to be a .502 team for the rest of the season. In other words, people who have money riding on this question think the Leafs are basically just as good as they thought they were when the season started and their performance through 18 games (now 19) is in no way indicative of their true talent level.

If we assume the Leafs are exactly a .500 team, then they have a 13% chance of making the playoffs after last night's loss. But no matter how you slice these odds, the Leafs were - and still are - perceived to be a middle-of-the-pack team, not the worst in the league. They just have a long road back into playoff contention.