Friday, January 07, 2005

Forbes.com on the efficiency of gambling markets

I got an email earlier this week from Forbes and was interviewed for the following article. I am pretty psyched. Even though the article is pretty short, but whenever you get mentioned with people from Chicago and Wharton things can not be all that bad ;). (and of course with people like Rodney Paul and Andy Weinbach, but since I know them they count twice!)

Forbes.com: Five Betting Tips For The NFL Playoffs


BTW Just in case you would like more on this topic, here is a part of the actual email where I replied to some of Forbes' questions:

Forbes: 1) I was hoping you could provide me with your insight on the efficiency- or inefficiency - of the sports gambling market. Essentially, what do you believe is the cause - or causes - of the inefficiencies that exist in this market?

Jim: Overall I would say the market is efficient. However, efficiency does not imply perfection. (that is the same trap that people fall into when it comes to financial markets---efficiency does not imply perfection.)

Why is it so? Because many people are trying to make money. If something gets out of line, then people will trade (in this case bet) to push thing back "in line". As new information becomes available (say someone is hurt), that immediately gets incorporated into the "lines" just like new information gets incorporated into the stock price through trading.

So why are betting markets not perfect? (or in other words where are there inefficiencies).

[While not discounting behavioral reasons, a] big reason is transaction costs and bet limits. For example, Rodney Paul and Andrew Weinbach have several papers that suggest overall the betting market is good, but in small pockets of the market there are predictable inefficiencies. These pockets tend to be caused when large players (who arguably would be more rational and be trading on real information and not feelings etc) are limited in their ability to push the market back to where it belongs. This line of reasoning would suggest that the betting lines on a a Div II college football game would be less efficient than betting on a super bowl game. Again this is much like stock market where the market for a DOW stock tends to be more efficient than that for a penny stock.

Now within these pockets of inefficiency, there are some interesting biases [that are consistent with behavioral explanations]. For instance Paul and Weinbach have shown that the bettors tend to put too much emphasis on scoring (that is they bet the "over" too often). There may be behavioral reasons for this (people like scoring).

And one that may be more relevant here is [by] Rodney Paul and Andy Weinbach. They published a paper that finds large underdogs tend to cover more in the NFL than a purely efficient market view would suggest. From my 2003 paper (Using Football to teach Finance) with Rodney Paul:
"For example, in gambling on football, large favorites (those favored by a touchdown or more) tend to be "over-bet" (Paul and Weinbach, 2003).

Another recognized anomaly in football betting markets involves betting on the total number of points scored in a game. In this situation it has been shown that bettors "over-bet" the "over" for those games where the over/under is 47.5 or greater (Paul and Weinbach, 2002). "
Why? It might be that people get utility from more than just the money they win. So by betting the favorite, they can then brag that they picked the right team (even though the right team may not have covered.) Or they might like scoring?

While these cases of inefficiency are important and fascinating, I think it is important to remember that they are the exception to the rule. Overall, it does appear that the gambling markets are quite efficient.

As an aside, I would add, that the behavior of betting markets can yield some valuable insights into the behavior of financial markets. There are more similarities than many people would suspect.

Forbes: Do you believe it difficult to come out ahead in the NFL gambling market? If so, why?

Jim: Yes. [see answer above] The Betting market tends to be pretty efficient. There are many very smart people all with approximately the same information. All have a vested interest to do well. That is not to say it can not happen, but just like the stock market, the vast majority of people are not going to come out ahead.

Forbes: I was hoping you could provide some tips for those who intend to gamble during the upcoming football playoffs.

Jim: Not to bet anything they can not afford to lose is by far my biggest piece of advice! :) But from the evidence, don't get too caught up with the favorites and remember that often times games are lower scoring than expected.


1 comment:

Anonymous said...

Luck is down but ill keep on trying as ill probably win if i miss out!