Using Betting Market Odds to Measure the Uncertainty of Outcome in Major League Baseball

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Betting market odds for Major League Baseball are used to examine the level of uncertainty of outcome, an ex-ante form of competitive balance. The efficient markets hypothesis cannot be rejected for the years 1990-2006 in Major League Baseball. Therefore, the odds provide an ex-ante measure of the uncertainty of outcome of baseball games in the minds of fans and bettors. The odds for both the American and National Leagues were shown to increase during the 1990s, implying more certainty in the expected outcome of the game. Bettors and fans believed favorites in Major League Baseball were more likely to win during this time frame. Differences in the average odds, formed ex-ante, compared to win percentages, formed ex-post, help to explain the dichotomy found in Schmidt and Berri (2001) in relation to public belief in less competitiveness compared to economic findings of relatively high levels of competitive balance.

Keywords: uncertainty of outcome, market efficiency, economics, baseball

Using Betting Market Odds to Measure the Uncertainty of Outcome in Major League Baseball

Major League Baseball offers an interesting dilemma in terms of competitive balance. Schmidt and Berri (2001) show that the 1990s, using traditional measures of competitive balance based on win percentages, were the most competitive decade in the history of Major League Baseball. As Schmidt and Berri (2001) note, during the same timeframe, fans and the media believed that baseball became much less competitive. This apparent dichotomy begs the question of how the field of economic research on sports could be so different from public perception. If the 1990s were truly the most competitive decade in baseball, why did the fans and media not recognize this?

One possible explanation is that economists are more acute observers of sporting events and that fans in general cannot sort out more competitive play from less competitive play. This explanation may be appealing to economists, especially when sitting around at the sports bar, but it does not offer insight into the source of this bias in judgment by fans and the media. Another possible explanation is that the term "competitive balance" means something different to the typical fans and media members who attend and watch countless baseball games. Their version of "competitive balance" may more closely resemble the term "uncertainty of outcome," a familiar term to economists that focuses on the doubt, or lack thereof, in the outcome of a sporting event. The economic definition of "competitive balance," on the other hand, uses win percentages of the teams or other ex-post figures (e.g., championships, division titles) to measure competitive balance within leagues on an annual basis. There are a wide range of studies in the economic literature on competitive balance in baseball and other sports. Excellent discussion on the topic is available in articles by Sanderson and Siegfried (2003) and Fort (2003) in a special issue of the Journal of Sports Economics.

Although the economic definition of competitive balance is quite useful, there are many reasons to consider that uncertainty of outcome measures may be much more useful and important. First, expectations of the uncertainty of outcome are formed exante, when consumer (fan) decisions take place. These decisions include purchasing tickets to the game and watching the game on television. These choices by consumers are ultimately the most important factors to the league, teams, television networks, and advertisers, who are all attempting to maximize profits. Current measures of competitive balance may capture the desires of fans to see close games, but it can only do this after the games have actually been played.

Given the fact that understanding fan preferences would be advantageous before games are played, the question remains if there is a way to measure the uncertainty of outcome before games are actually played. …