Market Efficiency and Bayesian Probability Estimation via the Beta Distribution

[CappinTerp]

Holy shit I read this once and my head is still spinning,Iguess its Greek to me!?

[JayTrotter]

How much do you take into account that the gambling "market" is not really a market, in that setting prices is completely monopolized by one group (the sportsbooks)? In my opinion, Sports books are more like the fed, than a typical commodities market.. The movements of the price are harder to understand. In a fair market, people buy price goes up, people sell price goes down. In sports betting people buy, people sell, and the sports book evaluates, then moves the line or doesn't at it's own discretion..

I would think your models work. I am just wondering if you have ever considered analyzing the market as a "controlled" market, instead of the commonly accepted supply and demand model.

Economics is an outdated model. It has one major failing, it assumes that there are scarce and valuable resources, which happen to be permanent. This is both depressing and untrue, because it disregards technology and technique. Plenty of teams with less resources win, based on technique and technology (New England..) If you want to look into the application of economics, read any economic report from the last 50 years about the next 10, they were all wrong. They all said we are going to run out of X, and the world will die. Someone always invented something that did what we needed/wanted and ran on Y, and once again the economists went back to making dire predictions about the future.. The reason their is a recession right now, is because of our dependence on outdated theories, models and technologies.

[TheInvestorbf]

It would still be possible to make a consistent predictable profit betting on a betting exchange, even if markets were perfectly efficient.

[Justin7]

It would still be possible to make a consistent predictable profit betting on a betting exchange, even if markets were perfectly efficient.

How? Profiting from a perfectly efficient market sounds like a contradiction.

[RickySteve]

I'm guessing he's referring to the commissions paid on offers at Matchbook.

Or it could be some day-trading nonsense.

[bolekblues]

Those not familiar with mathematical reasoning won't be able to understand this anyways. There are a bunch of papers written on this; the simplest form is checking to see if various betting rules would turn a profit, and if so, is it statistically significant. Not surprisingly, blindly betting home underdogs and unders has not proven to be a very successful strategy. The more complicated form, yet extremely simplistic for a publishable paper, uses probit/logit models and simply runs the regression: Prob(Home Win) = Market Estimate of Probability of Home Win + whatever other available information you consider to be important (such as a Home Field dummy, the Total, the previous game's result, etc.) + e and checking to see if any of the other available information is statistically significant. Sadly, the above article would yield a better and more thorough paper than any of the academics have come up with. The famous author of Freakonomics, S. Levitt, uses data from an NFL handicapping tournament to try and make inferences about market efficiency - an idea which is of course ridiculous given tournaments lead to strategic situations that cause bettors to bet games they otherwise wouldn't. Ganch, if you want an article published in a (mediocre) journal you should e-mail some of the current economist dorks working on gambling markets: Andrew Weinbach, Rodney Paul, Woodland & Woodland, Raymond "Skip" Sauer, etc.

I am glad that someone delves into formal research of market efficiency as I have recently written my master's thesis about an NBA point sprad market. I use some of the techniques mentioned here, but haven't tried what ganch writes about. As far as sources, I used the following in my thesis (thought I would list them since you mentioned some of the names). If someone is interested I could send pdfs of them, have many others as well as I collected lots of academic papers in preperation for my thesis.

1. Ates, C. (2004). ‘Behavioural Finance & Sports Betting Markets’, MSC in Finance and International Business, Aarhus School of Business

2. Even, W. and Noble, N. (1992). ‘Testing Efficiency in Gambling Markets’, Applied Economics, vol. 24, (January). pp. 85-88.

3. Fama, E. (1970). ‘Efficient Capital Markets: A Review of Theory and Empirical Works’, Journal of Finance, vol. 25, (May). pp. 383-417.

4. King Yao. (2007). ‘Weighing the Odds in Sports Betting’, Pi Yee Press, USA.

5. Levitt, S. (2004). ‘Why Are the Gambling Markets Organized so Differently from Financial Markets’, The Economic Journal, vol. 114, (April), pp. 223-246.

6. Oorlog, D. (1995). ‘Serial Correlation in the Wagering Market for Professional Basketball’, Quarterly Journal of Business and Economics, vol. 34, (2), pp. 96-108.

7. Paul, R. and Weinbach, A. (2007). ‘Does sportsbook.com Set Pointspreads to Maximize Profits? Tests of Levitt Model of Sportsbook Behavior’, Journal of Prediction Markets, vol. 1, (3), pp. 209-218.

8. Paul, R. and Weinbach, A. (2008). ‘Price Setting in the NBA Gambling Market: Tests of the Levitt Model of Sportsbook Behavior, Journal of Sport Finance, vol. 3, (3), pp. 138-145.

9. Sauer, R. (1998). ‘The Economics of Wagering Markets’, Journal of Economic Literature, vol. 36, (December), pp. 2021-2064.

10. Sauer, R., Brajer, V., Ferris, S. and Marr, M (1988). ‘Hold Your Bets: Another Look at the Efficiency of the Gambling Market for National Football League Games’, Journal of Political Economy, vol. 96, (1), pp. 206-213.

11. Tryfos, P., Ceasey, S., Cook, S., Leger, G. and Pylypiak, B. (1984). ‘The Profitability of Wagering on NFL Games’, Management Science, vol. 30, (January), pp. 123-132.

12. Vergin, R. and Scriabin, M. (1978). ‘Winning Strategies for Wagering on National Football League Games’, Management Science, vol. 24, (August), pp. 809-818.

13. Woodland, B. and Woodland, M. (2005). ‘Appropriate Statistical Methodology for Testing the Efficiency of Betting Markets Involving Spread and Totals’, Journal of Economics and Finance, vol. 29, (November), pp. 385-390.

14. Zuber, R., Gandar, J. and Bowers, B. (1985). ‘Beating the Spread: Testing the Efficiency of the Gambling Market for National Football League Games’, Journal of Political Economy, vol. 93, (4). pp 800-806.

15. Zuber, R., Gandar, J., Dare, W. and Brown, C. (1998). ‘Informed Traders and Price Variations in the Betting Market for Professional Basketball Games’, Journal of Finance, vol. 93, (February), pp. 385-400.

16. Zuber, R., Gandar, J., O’Brien, T. and Russo, B. (1988). ‘Testing Rationality in the Point Spread Betting Market’, Journal of Finance, vol. 43, (September), pp. 995-1008.

17. Zuber, R., Gandar, J. and Russo, M. (1993). ‘Testing Efficiency in Gambling Markets: a Comment’, Applied Economics, vol. 25, (January). pp 937-943.

[CHUBNUT]

How? Profiting from a perfectly efficient market sounds like a contradiction.

it happens all the time on betfair. If people couldnt win there wouldnt be a viable market, its all in the mind.

[RickySteve]

it happens all the time on betfair. If people couldnt win there wouldnt be a viable market, its all in the mind.

Players Talk is the next door down.