What is Diversification?
If you hang around the fantasy community, you won't have to wait very long before someone discusses diversification. It’s a common concept that is frequently mentioned in passing, but which rarely receives any in-depth discussion. What is it? Why do we do it? When is it appropriate? How is it accomplished?
Diversification comes to us from the field of finance. The idea is to invest in a variety of different assets to minimize risk. If someone invested all of his money in Apple stock and news came out tomorrow that the newest iDevice caused sterility, brain cancer, and halitosis, then that single piece of bad news would devastate his entire investment portfolio. If he had half of his money in shares of Apple and the other half in shares of WalMart, then at least half of his money would survive the day unscathed.
Similarly, I might believe that Jamaal Charles is the #1 player in all of fantasy football this year, but if I join twenty leagues and receive the #1 pick in all of them, I probably won’t want to take Jamaal Charles every time. He may be the best player on my board, but if I do not diversify, a single fluke injury could cost me a championship in all twenty leagues. If I view LeSean McCoy as a comparable value, then by splitting my shares evenly between them I cut my exposure to a single injury or underperformance in half.
When Should You Diversify?
If you’re only in one league, obviously diversification is impossible. If you’re in two leagues, diversification still probably isn’t a compelling enough interest to come into play. Once you’re in 3 or more leagues, however, it’s probably a pretty good idea to start spreading your risk around a little bit. If I’m in three leagues, I will often ask myself before drafting if the player in question really is worth owning in all three leagues, or if I’d rather only own him in 2 of 3. The question of diversification comes down to how confident you are in your ranking- and not just in your entire set of rankings in general, but in that individual ranking in particular. I think that Jamaal Charles is better than LeSean McCoy, but it’s pretty close and I’m not incredibly confident, so I’d probably achieve close to a 50/50 split between them when diversifying. On the other hand, I feel pretty confident that Calvin Johnson is better than Demaryius Thomas this year, so if I were drafting in 10 leagues I might walk away with Calvin in nine and Demaryius in one. In an even more lopsided comparison, I think that Rob Gronkowski is almost certainly a better pick than Julius Thomas, so if I drafted 100 times, I might draft Gronkowski in all 100. Diversification is never a compelling enough reason to pass up significant value. It serves more as a tie-breaker within a tier than a reason to reach down to another tier entirely. If I were drafting in 100 leagues and really felt like I was getting too many shares of Rob Gronkowski, I’d rather diversify by drafting a different position entirely than by taking a clearly-inferior player at the same position.
Why should you diversify?
At times the idea of drafting someone other than the highest-rated player left on your board can seem counterintuitive, but as was mentioned, diversifying is all about mitigating risk. If you’re an above-average fantasy owner (and, let’s be honest- armed with a Footballguys subscription the odds are fantastic that you’re an above-average fantasy owner), you should be accumulating positive value with every pick you make. In that case, you should want to minimize the risk of fluke mistakes and let your natural advantage carry the day. If a thought experiment could be helpful, imagine that you are flipping a weighted coin that comes up heads 60% of the time, and you have $100 to bet on the outcome. Would you bet all $100 on a single flip of the coin? That’s a risky strategy that will leave you bankrupt 40% of the time, even despite your natural advantage. If you’d instead split that bet into 10 different $10 bets, the odds of you losing any money at all fall all the way down to about 16.5%. And even then, the downside risk is capped- the odds of you losing half of your money or more are just 1.2%. The odds of losing everything are 0.01%. If you can consistently gain an advantage over the house, then splitting your bets into smaller chunks like that dramatically improves your chances of coming out ahead in the long run. Even if we factor in that diversifying means making slightly worse bets (i.e. drafting the 2nd-best player on your board instead of the best one), the math does not change substantially. Even if you made ten bets at a 58% or 59% chance of paying out (as opposed to one large bet at a 60% chance of paying out), the numbers would heavily favor you coming out ahead with multiple smaller bets.
Now, if your goal is to maximize your chances of winning absolutely every league you enter, then diversifying isn’t the right strategy. In that case you want to go all-in on the same players and hope you don’t get any unlucky breaks. Going back to the coin-flipping analogy, if you absolutely have to walk out with $200 at the end, then do not split your bet up; that gives you a 60% chance of hitting the jackpot, while the split bets will only pay out a full $200 less than 1% of the time. But if your goal is to consistently win money- or, in the case of fantasy football, consistently win lots of leagues year after year- then diversification is a great strategy to achieve that goal. By limiting your exposure to any one random event, (like an unlucky ACL tear), you give yourself plenty of room to consistently win.
How should you diversify?
The key to diversifying properly is not giving up too much value. When you have two players on the board rated similarly, that’s the perfect time to diversify. When you have one player who is head and shoulders above everyone else, then do not diversify, even if you already own him everywhere. Diversifying is a smart strategy for which it makes sense to give up a little bit of value, but the key here is to give up as little as possible. Using our coin-flip analogy, it’s okay to pass on a 60% bet to grab a 59% bet, but don’t pass on a 60% bet to grab a 55% bet.
The other key to diversifying properly is understanding confidence. Your willingness to diversify should be inversely proportional to how confident you are in your evaluation. If, for instance, you have someone rated much higher than his ADP, that should cause you to be a little bit less confident; you have to assume that his there’s a reason why his ADP is what it is, and even if you disagree with that reason, there’s always a pretty good chance the consensus is right. Similarly, if you have someone rated much lower than his ADP and he winds up falling a bit, that should cause you to rethink your opposition. I’ve drafted players that I wasn’t a big fan of just because they fell much further than ADP said they should. Last year, that practice netted me Knowshon Moreno on several of my teams. I've rarely been quite so glad to be wrong about a player.
This brings us to an advanced diversification technique: you want to diversify your positive beliefs, yes. At the same time, you want to diversify your negative beliefs, too. If I am quite high on Percy Harvin, (and I am), that is a positive belief. I might wish to diversify that belief a little bit and pass on Harvin in a few of my leagues. At the same time, if I’m quite a bit lower than the consensus on Cordarrelle Patterson, (and, again, I am), then that is a negative belief. If I find myself in a draft where Patterson falls, I might want to consider drafting him just in case I’m wrong and the consensus is right. Diversifying a negative belief is high-level, Diversification 301-type coursework, but the underlying fundamentals are exactly the same; you believe something, but you acknowledge you might be wrong and occasionally disregard that belief to protect against that possibility. It's about making sure that a single bold position does not wind up costing you disproportionately across all of your leagues.
Final Thoughts
Diversification is a powerful tool that can let above-average fantasy owners who are in several leagues really demonstrate their skill without the risk of random fluke outcomes ruining their entire year. It’s quick and it’s easy. It even makes watching football more fun during the season because it dramatically expands rooting interests. While any advice that suggests you should take someone other than the best player on your board should be met with skepticism, the math behind diversification is rock solid, and the concept is used by all of the smartest, (and richest), investors in the world. With the ever-increasing popularity of fantasy football (and most recently, the explosive growth of the MFL10 format), more and more people are finding themselves in multiple leagues and in a position to start asking whether they should begin diversifying their rosters, and how best to go about it. Armed with this information, hopefully you all have the tools necessary to survive the ups and downs of a long and unpredictable season and come out the other side holding a championship trophy... or ten.