Academic journal article Financial Services Review

Anchoring, Affect, and Efficiency of Sports Gaming Markets around Playoff Positioning

Academic journal article Financial Services Review

Anchoring, Affect, and Efficiency of Sports Gaming Markets around Playoff Positioning

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

Certainly one of the most tested theories in finance is market efficiency. Indeed the subject has such depth that major journals have published significant literature reviews by its first proponent (Fama, 1970, 1991). Proponents of inefficiency are also chronicled (Hirshliefer, 2001), and an entire subfield, behavioral finance, has developed from the works of Kahneman (Kahneman and Tversky, 1979), largely as a challenge to investor rationality. In relatively short order, researchers recognized that sports gaming markets were potentially ripe for considering direct market efficiency tests. In parallel to the traditional financial markets, the gaming-based research has streamed from identifying a potential statistical inefficiency, to expanding the research to including trading costs, and finally to providing possible explanations of the persistence of cataloged economical inefficiencies (and typically ignoring the joint hypotheses problem of the testability of market efficiency [Fama, 1991]). The behavioral finance field also suggests the concept of "affect," which is the desire to associate with perceived "good" firms and projects that may thereby influence financial judgment (MacGregor, Slovic, Dreman, and Berry, 2000).

A popular anecdotal belief surrounding professional sports franchises is that once teams have secured a post-season position, they are apt to relax and lose focus, either unintentionally or as a strategic maneuver to refresh themselves for post-season tournament play.1 This "letdown effect" can be seen as a lack of motivation on the part of players who know there is nothing significant left to play for, a strategic maneuver on the part of coaches to give their players maximum rest before the start of post-season play, or both. In this article we consider whether the market makers of American professional sports betting markets, "bookmakers," incorporate this letdown effect into the wagering lines of regular season contests, near the conclusion of the season, when exactly one team in the game has limited motivation. More important, is this limited motivation and strategic resting of players priced? Early works in more traditional financial settings indicate that after reaching a goal, some degree of letdown, for either strategic or emotional reasons, may be commonplace (Chevalier and Ellison, 1997).

We examine the most common wager: a spread bet.2 Our questions are does the spread price this letdown as an efficient market suggests? Is this a tradable position? What are possible explanations of the existence of these tradable positions? There is some controversy about the spread and what the purpose of the spread is to the bookmaker. Is the spread similar to a local floor trader who wants, at the end of the day, a matched book (equal long and short positions)? Or is the bookmaker taking an active position? The research is mixed with proponents of both the matched book (Avery and Chevalier, 1999) and positioning hypotheses (Humphreys et al., 2013). Fortunately, the structure of our study does not need to resolve this question as we examine both the opening and closing spreads of games to seek evidence of efficiency.

Prior research in gaming markets also gives some indication that irrational bettors may be willing to pay too high of prices (by accepting inflated spreads for wagers) to support "favorites" (see, e.g., Vergin and Scriabin, 1978, and Paul and Weinbach, 2005a).3 As most teams that have clinched playoff positions late in seasons would be favored against opponents who have not, they might draw a particularly disproportionate amount of wagers from naïve bettors, unaware of inflated spreads. There is evidence that as point spreads increase in the National Football League (NFL), the number of wagers placed on the favored teams increases (Paul and Weinbach, 2011). Some bookmakers may even intentionally set spreads off from the value they believe would result in a 50/50 split of wagered funds to increase profitability (Levitt, 2004). …

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