Market Efficiency and NCAA College Basketball Gambling

By Paul, Rodney; Weinbach, Andrew | Journal of Economics and Finance, Fall 2005 | Go to article overview

Market Efficiency and NCAA College Basketball Gambling


Paul, Rodney, Weinbach, Andrew, Journal of Economics and Finance


Abstract

The betting market for NCAA college basketball is examined from the 1996-97 season through 2003-04. In the overall sample, market efficiency cannot be rejected. For big favorites, specifically those favorites of 20 or more, a simple strategy of betting the underdog in these games is shown to reject the null hypothesis of a fair bet since the underdog wins more than implied by efficiency. This bias appears to be the same as in other sports. The home-team bias in college basketball is shown to be the opposite of the other sports, however, since big favorites win more often than implied by efficiency. Potential reasons for this bias such as NCAA tournament incentives and uniformity of playing conditions are discussed.

Introduction

This paper examines the efficient markets hypothesis as it relates to the gambling market for NCAA college basketball. College basketball is a very popular sport with fans and gamblers alike. Total betting action during the NCAA men's basketball tournament, dubbed March Madness, rivals that of the NFL's Super Bowl in sportsbooks in Las Vegas.

The betting market for NCAA college basketball is established by a point spread. A bet on the favorite must lay points, meaning that the favored team must win by more than the point spread on the game to cover the bet. A winning bet on the underdog occurs when either the underdog wins outright or the favorite wins by less than the posted point spread. Some favorable betting strategies have been shown to exist in betting markets that use point spreads. These favorable strategies, some of which have been shown to be statistically profitable, consist of either betting on home underdogs, big underdogs, or both to take advantage of an apparent bias against these teams.

In the NFL, large underdogs were shown to be potentially profitable. [See Vergin and Scriabin (1978).] Using the same betting strategy out of sample, however, was not shown to be statistically profitable, although bettor bias toward the favorite was still shown to exist. [Tryfos et al. (1984).] Home underdogs were also shown to be underbet in the NFL. [Golec and Tamarkin (1991).]

In college football, bettor bias was shown to exist toward the favorite but was not shown to be profitable. [See Golec and Tamarkin (1991).] However, in a longer sample of 25 years, big favorites and big road favorites were shown to be overbet. A strategy of betting against big favorites was shown to reject the null hypothesis of a fair bet, while a strategy of betting against big road favorites was shown to be statistically profitable. [See Paul and Weinbach (2003).]

In professional basketball, the effects of streaks, or "hot-hand" effects, were studied to determine whether winning or losing streaks impacted point spreads or game outcomes. [See Camerer (1989) and Brown and Sauer (1993).] Although big underdogs and the home/road bias were not explicitly studied in these papers, the market for the NBA appeared to be efficient. In the sample of the 1995-96 to 2001-02 seasons, a bias was shown toward big favorites and big home favorites. Simple strategies of betting big underdogs were shown to reject a fair bet and simple strategies of betting big home underdogs were shown to reject not only a fair bet but also the null of no profitability. [See Paul and Weinbach (2005).]

Similar biases of overbetting favorites were found in baseball and hockey, where odds betting rather than point-spread betting are the norm. In point-spread betting, stronger favorites must win by a larger margin of victory to cover the bet, but the payout per dollar wagered remains constant for all bets ($10 for each $11 bet). In odds betting, the wagering proposition is merely whether the team will win the game, but stronger favorites offer a lower return per dollar bet won. While a tendency to overbet favorites has been observed in sports betting, racetrack bettors have been observed to overbet the underdogs, commonly referred to as longshots. …

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