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This is the Theoretical Explanation of Pythagorean Expectation:
Initially the correlation between the formula and actual winning percentage was simply an experimental observation. In 2003, Hein Hundal provided an inexact derivation of the formula and showed that the Pythagorean exponent was approximately 2/(σ√π) where σ was the standard deviation of runs scored by all teams divided by the average number of runs scored.[8] In 2006, Professor Steven J. Miller provided a statistical derivation of the formula[9] under some assumptions about baseball games: if runs for each team follow a Weibull distribution and the runs scored and allowed per game are statistically independent, then the formula gives the probability of winning.[9]
More simply, the Pythagorean formula with exponent 2 follows immediately from two assumptions: that baseball teams win in proportion to their "quality", and that their "quality" is measured by the ratio of their runs scored to their runs allowed. For example, if Team A has scored 50 runs and allowed 40, its quality measure would be 50/40 or 1.25. The quality measure for its (collective) opponent team B, in the games played against A, would be 40/50 (since runs scored by A are runs allowed by B, and vice versa), or 0.8. If each team wins in proportion to its quality, A's probability of winning would be 1.25 / (1.25 + 0.8), which equals 502 / (502 + 402), the Pythagorean formula. The same relationship is true for any number of runs scored and allowed, as can be seen by writing the "quality" probability as [50/40] / [ 50/40 + 40/50], and clearing fractions.
The assumption that one measure of the quality of a team is given by the ratio of its runs scored to allowed is both natural and plausible; this is the formula by which individual victories (games) are determined. [There are other natural and plausible candidates for team quality measures, which, assuming a "quality" model, lead to corresponding winning percentage expectation formulas that are roughly as accurate as the Pythagorean ones.] The assumption that baseball teams win in proportion to their quality is not natural, but is plausible. It is not natural because the degree to which sports contestants win in proportion to their quality is dependent on the role that chance plays in the sport. If chance plays a very large role, then even a team with much higher quality than its opponents will win only a little more often than it loses. If chance plays very little role, then a team with only slightly higher quality than its opponents will win much more often than it loses. The latter is more the case in basketball, for various reasons, including that many more points are scored than in baseball (giving the team with higher quality more opportunities to demonstrate that quality, with correspondingly fewer opportunities for chance or luck to allow the lower-quality team to win.)
Baseball has just the right amount of chance in it to enable teams to win roughly in proportion to their quality, i.e. to produce a roughly Pythagorean result with exponent two. Basketball's higher exponent of around 14 (see below) is due to the smaller role that chance plays in basketball. The fact that the most accurate (constant) Pythagorean exponent for baseball is around 1.83, slightly less than 2, can be explained by the fact that there is (apparently) slightly more chance in baseball than would allow teams to win in precise proportion to their quality. Bill James realized this long ago when noting that an improvement in accuracy on his original Pythagorean formula with exponent two could be realized by simply adding some constant number to the numerator, and twice the constant to the denominator. This moves the result slightly closer to .500, which is what a slightly larger role for chance would do, and what using the exponent of 1.83 (or any positive exponent less than two) does as well. Various candidates for that constant can be tried to see what gives a "best fit" to real life data.
The fact that the most accurate exponent for baseball Pythagorean formulas is a variable that is dependent on the total runs per game is also explainable by the role of chance, since the more total runs scored, the less likely it is that the result will be due to chance, rather than to the higher quality of the winning team having been manifested during the scoring opportunities. The larger the exponent, the farther away from a .500 winning percentage is the result of the corresponding Pythagorean formula, which is the same effect that a decreased role of chance creates. The fact that accurate formulas for variable exponents yield larger exponents as the total runs per game increases is thus in agreement with an understanding of the role that chance plays in sports.