FREAKONOMICS MEETS THE BOOKMAKER
Recall from chapter 38 that if a bookmaker gives 11–10 odds on NFL point spread bets and sets a line so that half the money is bet on each side, then the bookmaker is guaranteed to make a riskless 4.5% profit.
Steven Levitt of Freakonomics fame showed that bookmakers can exploit bettor biases to make an expected profit exceeding 4.5% per dollar bet. Levitt obtained bettor records for 20,000 bettors during the 2001 NFL season. He found that much more than 50% of all money is bet on favorites and less than 50% on underdogs. When the home team was favored, 56.1% of the bets were on the favorite and 43.9% of the bets were on the underdog. When the visiting team was favored, 68.2% of the bets were on the favorite and 31.8% of the bets were on the underdog. These results are inconsistent with the widely held belief that bookmakers set spreads in an attempt to balance the amount of money bet on the underdog and favorite. We will see that if more money is bet on favorites, and favorites cover the spread less than half the time, then bookmakers can earn an expected profit exceeding 4.5%. For Levitt's sample, this does turn out to be the case. In Levitt's sample, bets on home favorites win 49.1% of time. Bets on home underdogs win 57.7% of time. Levitt found that bets on visiting favorites win 47.8% of time, while bets on road underdogs win 50.4% of time. Thus favorites are not a good bet. These data indicate that the line on favorites is inflated to take advantage of the bias of bettors toward favorites. For example, when setting the line for Super Bowl XLI the bookmaker may have thought the Colts were only 6 points better than the Bears. Since bettors are biased toward the favorite, the bookmaker might set the line at Colts —7. Since the true situation is that the Colts are 6 points better than the Bears, a bet on Colts —7 has less than a 50% chance of winning. Because bettors are biased toward favorites, in all likelihood lots of money will still come in on the Colts. Since the true point spread