The Efficient Sports Betting Market Hypothesis
posted by Dave Hoffman
Reader CDP passes along a link to this interesting story from SportsInsights.com, sort of an intellectual’s Sports Book. The article summarizes some academic literature on the efficiency of the betting market in professional and college-level football games. It’s just a puzzle: the sports betting market, despite being quite liquid and well-researched, isn’t particularly efficient.
Finance professor Richard Borghesi, of Texas State, has done much of the recent work on the problem.
One recent paper shows that the “home underdog” effect is most robust late in the season, when the influx of naive bettors swamps the ability of sophisticated bettors to “fix” the line. Another paper suggests that the betting market is quite slow to react to new, odds-relevant, weather information.
Why do such inefficiencies persist? Borghesi argues that the market makers are crooked: bookies are deliberately taking advantage of bettors’ cognitive biases. Perhaps, but as Josh Wright argued here in response to a post of mine about consumer irrationality, such explanations don’t satisfy unless we’ve got a theory explaining why competitors don’t compete away the “irrationality premium.”
So what of the explanation that the late-season betting is “too heavy” with amateurs to remain rationally priced. This is odd too: the home-dog effect is is well-known, yet it persists as a good strategy. Given all that money lying on the table, why hasn’t Goldman established a private sports betting fund?
The only reason I can think of is that such interventions would be unlawful. Thus, restrictions on gambling, presumably in place to deter fraud, are in fact enabling exploitation of gamblers. We could test the hypothesis by looking at markets where gambling was totally lawful but which have very irrational fan bases. Does the home-dog effect pop up for premier league soccer games?
September 14, 2007 at 11:24 pm
Posted in: Empirical Analysis of Law
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