Sunday, October 12, 2008

Markets for sports outcomes- The long odds bias!

Since it is Sunday, it is time for sports, at least in the United States, I thought it would be an appropriate time to talk about markets based upon sports outcomes. People have been betting on sports for as long as there have been sports - I am sure that the ancient Romans had side-bets going on the gladiators. Today, sports betting is a multi-billion dollar business, though a big chunk of it is underground. In addition, we have markets like Tradesports.com (an online betting market), where you can bet on just about anything in the world, As with other markets, the question is whether the odds/prices you see in these markets are good predictors of success or failure.
Studies that have looked at sporting markets have uncovered some interesting evidence that gamblers bet too little on favorites and too much on long odds. As they lose money, they seem to increase their betting on longer odds. This has been attributed to a number of factors including a general tendency among humans to under estimate large probabilities (such as the likelihood that you will get sick) and over estimate small ones (say the odds of dying in an airline accident) and the craving for the excitement that comes from betting on long odds. Extending this finding to financial markets, this would lead to us to believe that deep out-of-the-money options and stocks in deeply distressed companies are likely to be over valued, since the long shot bias will push up their prices. Conversely, companies that are in boring and predictable businesses will be under priced like favorites. 
Of course, all of the evidence from the sports betting market has to be taken with a grain of salt, since sports gamblers (at least the big ones) may be less risk averse than the rest of us. So, do what you will with that finding!! I am going back to watching my son play soccer (and no bets on that one)!!!

8 comments:

gmrbluee said...

Have you read Nassim Taleb's "Fooled By Randomness"?
He claims (and made a lot of money) from investing on significantly out of the money options, on the premise that people actually UNDER estimate the odds of a rare event occurring.

Heshrulz said...

Hi,

Its a very interesting point.
Like gmebluee said Taleb makes quite the opposite hypothesis that people underestimate smaller probabilities and overestimate larger probabilities!

But I guess the difference is that in sports it’s largely a zero sum game so betting on low odds is a lot more attractive. If Taylor Dent has to win Wimbledon then Federer necessarily has to lose. But I wonder if Reliance's returns will be influenced by the performance of other SME stocks.

randomthoughts said...

It would be interesting to check the correlation between sports betting and equity markets..
My guess is, since compulsive speculators need a market, sports betting maybe the alternative during bear phases in equity markets...

Aswath Damodaran said...

I have read Mr.Taleb's work and I believe his core idea - that we are too dependent on the normal distribution in our models - is true. However, I take everything he says with a grain of salt. He has a gift for hyperbole and exaggerates his successes as a money manager.

Tyler said...

Your view is definitely something Id like to see more of. Thanks for this blog. Its fantastic and so is what youve got to say.You make a great point.
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Muhammad Amir said...

I am sure that the ancient Romans had side-bets going on the gladiators. Today, sports betting is a multi-billion Spot Odds dollar business, though a big chunk of it is underground. In addition, we have markets like Tradesports.com (an online betting market), where you can bet on just about anything in the world,

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Inunz said...

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