For everyone's information here is a part of the article "The Prospectus Hit List - The System Explained".
For my money, the single most important tenet of sabermetrics is that there's a predictable relationship between a team's winning percentage and the number of runs it scores and allows. Bill James first codified this in his original Pythagorean formula:
win% = (RS^2)/(RS^2 + RA^2)
RS and RA are runs scored and runs allowed, G is games. Studies by BP's Clay Davenport have shown that not only is the Pythagorean formula a good predictor of a team's winning percentage after the fact (how many games should team X have won), it's a better predictor of future winning percentage than the team's actual winning percentage.
The Hit List builds on this in creating our version of the power rankings. It's not subjective; the rankings are computed by equally weighting actual, first-, second- and third-order winning percentages for the season to date as calculated in BP's Adjusted Standings (a Davenport invention). Actual winning percentage is obvious enough, the percentage of games a team wins. The other three are calculated using the Pythagenpat method, a close relative of Bill James' original Pythagorean formula where
win% = (RS^X)/(RS^X+ RA^X)
X = (RS+RA)/G)^.285
First-order winning percentage is computed using actual runs scored and allowed.
Second-order winning percentage uses equivalent runs scored and allowed, based on run elements (hits, walks, total bases, etc.) and the scoring environment (park and league adjustments).
Third-order winning percentage adjusts for the quality of the opponent's hitting and pitching via EqA allowed and opponents' EqA.
By using the four percentages, we're correcting for teams that over- or underperform relative to how many runs they've scored and allowed, how many runs they should have scored/allowed given the number and type of hits, walks and other events, their ballpark environment and their quality of competition. There's nothing written in stone about this formula, but neither--contrary to some of the accusations I received from card-carrying Angels fans--is there any hidden agenda. It's simply a way of looking at the question, "How good is each team?" and using a few related but slightly different objective measures to answer that question. In coming up with a means to rank the teams, I wanted to find a way that gave weight to various categories of performance without overcompensating for any of them. That includes actual winning percentage, but goes beyond to try to get a truer picture of what's going on than simple wins, losses and run totals will tell you.
Sorry for the length of the text but I hope it clears up some confusion.