I’ve long been interested in the adjustment of expectations to changes in team performance. Several of my papers model point spreads in the betting market based on the market’s implied estimates of team strength. In the case of NFL betting, the season is so short that it is difficult for both the market and statistical models to adjust estimates of team strength based on team performances. Score differences are notoriously random and as a consequence it's hard to tell what measure of luck or ability is responsible for any given outcome. Nevertheless, the market does adjust, and this year there is a particularly notable example in the form of the Dallas Cowboys. Here are the point spreads and scores to date for Cowboys games:
These data bring home the obvious fact that the Cowboys' performance has been way below expectations. Prior to Sunday's game against the Giants they had failed to meet expectations (as defined by the point spread) in 7 of 8 games -- bad enough to result in the departure of Coach Wade Phillips. But what really jumps out at me is the implied change in team strength between the two games against the NY Giants. Three weeks ago the Cowboys were favored by 3.5 points at home; yesterday they were 11.5 point dogs in NY. Estimates of the home field advantage imply its worth about a field goal, hence a 6 point adjustment is in order for swapping stadiums between games. Thus, if expectations had not adjusted and relative team strength had been constant, the prior spread implies that the Cowboys would have been 2.5 point dogs in New York for yesterday's game.
This implies a 9 point adjustment in relative team strength between the two games. That's a massive shift in the sentiment of bettors! Although it is possible in principle to attribute some fraction of this to an increase in the perceived strength of the Giants (who beat a mediocre Seattle team in between beating the Cowboys by six and getting whipped by them yesterday), most of the change surely rests with the Cowboys. The absence of QB Tony Romo, who was injured in the first game with the Giants, can account for another 3 points or so, but that would still leave us with a 6 point change in the perceived ability of the Cowboys over a matter of four games.
I can't recall a similar collapse in the "price" of an NFL team in the point spread market. I'm tempted to break out my old point spread models to see what the "pre-collapse" market implies for Sunday's game. Right now the Cowboys are favored by a touchdown over Detroit. It memory serves, Detroit has not won on the road since I was in high school. Although 7 points is a lot "to give" in the NFL, this spread suggests to me that the market is sticking with the recently revised view that the Cowboys are a poor team.