Football Betting and the Efficient Market Hypothesis
Journal article by Ravija Badarinathi, Ladd Kochman; American Economist, Vol. 40, 1996
Journal Article Excerpt
Football betting and the efficient market hypothesis. by Ravija Badarinathi , Ladd Kochman The efficient market hypothesis asserts that investors cannot consistently "beat the market" because stocks reside in perpetual equilibrium. Supporters point to the 100,000+ analysts and traders whose collective actions ensure that the prices of the 3000 or so major stocks do not stray too far from their respective values. Pankoff (1968) reasoned that the football-betting market attracts participants no less numerous, knowledgeable or competitive than its Wall Street counterpart and therefore functions as a convenient proxy for testing the fallibility of market consensus. Pankoff concluded that Las Vegas pointspreads on National Football League games contained no exploitable biases after regressing actual winning margins (WM) on betting lines (BL) for the 1956-65 seasons and finding intercept (a) and slope (b) coefficients insignificantly different from the values - 0 and 1, respectively - expected in an efficient market. The first WM = A + bBL + e (1) analysis of pointspreads in the context of betting rules(1) was performed by Vergin and Scriabin (1978) who applied 70 strategies to NFL games during the 1969-74 seasons. Their claim that 23 of those rules were profitable attracted the attention of Tryfos et al. (1984) who investigated how Vergin and Scriabin measured profitability and whether their findings were sample-specific. After demonstrating that the Z-value used by V&S ([Z.sub.1]) tested only for nonrandomness and that profitability required a separate Z-value ([Z.sub.2]), Tryfos et al. still found that 20 of the 23 [Z.sub.1] = [W - 0.5 (B)] X [[B(p)(1 - p)].sup.-1/2] (2) [Z.sub.2] = W/B - (1.1)L/B / [{1/B[(W/B + (1.21)L/B) - [(W/B - (1.1)L/B).sup.2]]}.sup.1/2] (3) where: W = winning bets B = total bets p = probability of wining (= 0.5) L = losing bets strategies that V&S had incorrectly characterized as profitable were, in fact, just that. However, when Tryfos et al. applied those same 23 rules to the 1975-81 NFL seasons, only three emerged as profitable. Methodology The purpose of this study is to apply the three betting strategies touted as profitable during both the 1969-74 and 1975-81 periods to the 1984-93 seasons. All three rules called for betting on the underdog when the pointspread was greater than five points. Vergin and Scriabin then suggested that by taking advantage of the variation in spreads among bookmakers in different cities, it was possible to improve the underdog's spread by one or more points. The vehicle for finding such an advantage is a syndicate, which V&S defined as a collection of gamblers located around the country each having betting arrangements with several local bookmakers. The specific strategies dictated the following: RULE #2: Bet on the underdog when the spread is greater than 5 points and an advantage of 1.0 point can be obtained in favor of the underdog. RULE #3: Bet on the underdog when the spread is greater than 5 points and an advantage of 1.5 points can be obtained in favor of the underdog. RULE #4: Bet on the underdog when the spread is greater than 5 points and an advantage of 2.0 points can be obtained in favor of the underdog. An additional rule was taken from V&S to measure the success of betting on underdogs when the spread is greater than five points but no point advantage is obtained. While the strategy did beat the 52.38-percent breakeven [rate.sup.2] for V&S, its use in this study has less to do with testing market efficiency than with isolating the value of a syndicate. RULE #1: Bet on the underdog when the spread is greater than 5 points. To illustrate how the foregoing rules were applied to the 1984-93 NFL games, imagine that you bet on a team that enters a contest as a 6 1/2-point underdog and exits as an 8-point loser. Denied any point advantage, Rule #1 results in an obvious loss. Rule #2 also leads to a losing wager since 7 1/2 points-that is, the 6 1/2-point handicap plus the extra point from a syndicate - fail to cover the eight-point deficit. Rule #3 produces a point-wise tie - i.e., no bet - since the 6 1/2-point spread plus the 1 1/2-point advantage equal the eight-point losing margin. Rule #4 provides a winning bet inasmuch as 6 1/2 points plus the two-point advantage exceed the eight-point gap. The source for all pointspreads and final scores for the 1984-93 period was Feist (1994). ResultsA total of 2272 regular- and post-season NFL games were played during the 1984-93 seasons. ... |
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