Monday, July 18, 2005

Comments on a economists look at NFL Gambling markets

I wrote this post in a thread in 2+2's books forum. This thread pertains to Steven Levitt's possible study on poker databases, but my post is specifically on his working paper on the NFL Gambling markets. From my post only, it may be a bit confusing, the whole thread can be found at this link:


Thank you for your response and explaining a bit about how peer review works. The NBER paper I read was a "NBER Working Paper Series" from December 2002. I have no idea if it was published or not...and frankly from my point of view, it matters not. Apologies in advance for my long and possibly rambling post below.

-------------------------------------------------------------------------------- the abstract, it says that "in sports betting, bookmakers announce a price, after which adjustments are small and infrequent." But above, you said, " the market barely moves" and that most gamblers search for the best lines. But that's not the same thing, no? I mean, isn't he just saying that individual adjustment by a bookie is slow and infrequent? Not that there is uniform lines across the market.


On page 1, he writes: "With sports wager, however, market makers (casinos and bookmakers) simply announce a "price" (which takes the form of a point spread, e.g., the home team to win a football game by at least 3.5 points), after which adjustments are typically small and infrequent."

He adds a footnote saying: "In the five days preceding a game, the posted price changes an average of 1.4 times per game. When the price does change, in 85 percent of the cases the line moves by the minimum increment of one-half of a point. Thus the posted spread on Tuesday is within one point of the posted spread at kickoff on Sunday in 90 percent of all games....."

Levitt doesn’t understand how huge a move of a half point or a whole point is in the NFL. It is a gigantic, volatile move. To write: “Thus the posted spread on Tuesday is within one point of the posted spread at kickoff on Sunday in 90 percent of all games....." is like saying the Dow Jones isn’t volatile because 90% of the trading days it moves less than 1,000 points.

A little background on football markets first in case you are not aware:

A pointspread is basically a handicap. A team that is a 3 point favorite is expected, on average, to win the game by 3 points. So subtract 3 points from the favorite (or add 3 points to the underdog) and then you find who won or lost the game as far as the pointspread is concerned. The Patriots were a 7 point favorite against the Eagles in this past Super Bowl. They only won by 3, so that means the winning side of the pointspread wager is the Eagles +7.

Lines have a juice (vig) attached to them, and it is usually -110 either way. This means the bettor has to risk $110 in order to win $100, or any fraction of that ratio ($11 to win $10, $22million to win $20million, etc.). If one were to look at this in terms of percentages, that would be roughly a market of 47.6% bid, and an offer of 52.4%. As a former derivatives trader, I equate this roughly to a market of $47.60 / $52.40 on a stock. As you can see, this market is incredibly wide. If the true price was $51, the market would still be $47.60 / $52.40 as the bookies would just keep the conventional -110 vig on the game. The same market as when the price is $49. There are reasons, which I won’t get into right now, why it is useful for the bookmaker to keep a -110 / -110 line instead of moving that line all over the place based on “minute” changes in the market.

There are some key numbers in the NFL. For example, if a line is the home team laying 3 points, there is around a 10% chance the home team will actually win by exactly 3 points. So now consider what this means when a bookie moves a line from 3 to 3.5. Using the mid-market, if 3 is the true fair price, being able to bet +3.5 on the underdog at no juice means that you will win 55% of the time and lose 45% of the time. That’s a great bet. When a line moves from 3 to 3.5 that’s equivalent to a stock moving from $50 to $55. How often do $50 stocks move $5 up or down in one day? The answer is not often. So a half point or full point move is a very large move. Even when it doesn’t seem like the line has moved, it could have moved but is not visible due to the line he is watching. In recent years, some low-vig online sportsbooks have become successful. At these books, it is possible to see the market move from +100 / -108 to +105 / -113 to -105/-103 in a few minutes based on the action that the book took. Yet, at the books with less competitive lines (almost all the places in Vegas), the customer would never know anything changed. They would have simply looked up at the board and seen -110 / -110, and it would look like nothing was going on. Why is there a difference in these markets? Reasons include: accessibility (you have to deposit cash at the online sportsbooks way in advance before you can make a bet, whereas in Vegas, you can just plunk down $50 from the check you cashed a few minutes ago), legality and the degenerate gambling attitude (for years, Nasdaq market makers would routinely buy or sell shares outside of the real market against their own customers. This is because the customers were not able or did not understand there was a better number for them. This may have changed since I’ve been out of the stock market for almost a decade now.)

It is simple stuff like this that he doesn’t present in the paper, and it is clear to me he doesn’t understand the nitty gritty of the NFL betting industry. The market can be volatile and can move without the layman knowing, even if he’s watching the betting screen. That was the main issue I had with it. There are also other problems with his paper, mainly due to his data that he is working with (he does acknowledge that is a possible problem). His data came from a low dollar season long handicapping contest where the entry fee is $250. Few serious true professional gamblers would use up their valuable time to enter such a contest. So therefore, I find his conclusions irrelevant. I mean, his conclusions may actually be true, but based on the data, he can’t draw some of the conclusions that he did.

But don't get me wrong - I think he does come up with some interesting aspects to football wagering in that paper. Using his data, he is able to figure out some issues that pro gamblers already know and figured out after years of betting - and that is to be commended. But it is the fact that he missed these basic things that are crucial – that’s what makes me wonder if he will make the same mistakes.

In another post, you stated something along the lines of his experience in horse racing. To say that he knows horse racing, and equating that to saying he understands sports betting or poker, is like me saying that a Phd candidate in Biology can be expected to write a legitimate paper in Physics (ok, maybe that’s a bit of an over-exaggeration ) . Even among the individual sports, there are incredible differences where one person could be an expert in one and have zero expectancy in betting another sport (I’m thinking specifically of the NFL versus Major League Baseball).

It may seem like I am attacking Levitt, but I’m not specifically. Instead, I’m attacking academics in general. I applaud Levitt for taking on these issues because they are interesting to me, I don’t think Milton Friedman or John Maynard Keynes would bother with NFL gambling markets. I read this paper only because that’s what I’m interested in. I would bet that many other economists would make the same mistakes if not more mistakes. That makes me sound like an arrogant prick, right? It sounds that way to me when I re-read what I typed. This coming from me, who only has a B.S. in Economics and who has barely remembered any of it. Oh well, I believe I am correct, and I have stated my reasons.

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