How Do Markets Function? An Empirical Analysis of Gambling on the National Football League
The market for sports gambling is structured very differently than the typical financial market. In sports betting, bookmakers announce a price, after which adjustments are small and infrequent. As a consequence, bookmakers do not play the traditional role of market makers whose primary function is to match buyers and sellers, but rather, take large positions with respect to the outcome of game. Using a unique data set that includes both prices and quantities of bets placed over the course of an NFL season, I demonstrate that this peculiar price-setting mechanism allows bookmakers to achieve substantially higher profits than would be possible if they played the role of the typical market maker. Bookmakers are more skilled at predicting the outcomes of games than bettors and are able to systematically exploit bettor biases by choosing prices that deviate from the market clearing price. While this strategy exposes the bookmaker to risk on any particular game, in aggregate the risk borne is minimal. Bookmaker profit maximization provides a simple explanation for heretofore puzzling deviations from market efficiency that were observed in past empirical work. I find little evidence that there exist bettors who are systematically able to beat the bookmaker, even given the distorted prices that bookmakers set. The results concerning whether aggregating across bettor preferences improves the ability to forecast outcomes are inconclusive.
|Date of creation:||Jan 2003|
|Publication status:||published as Levitt, Steven D. "Why Are Gambling Markets Organised So Differently From Financial Markets?," Economic Journal, 2004, v114(495,Apr), 223-246.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Woodland, Linda M & Woodland, Bill M, 1994. " Market Efficiency and the Favorite-Longshot Bias: The Baseball Betting Market," Journal of Finance, American Finance Association, vol. 49(1), pages 269-279, March.
- Tim Kuypers, 2000. "Information and efficiency: an empirical study of a fixed odds betting market," Applied Economics, Taylor & Francis Journals, vol. 32(11), pages 1353-1363.
- Ali, Mukhtar M, 1977. "Probability and Utility Estimates for Racetrack Bettors," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 803-815, August.
- Thaler, Richard H & Ziemba, William T, 1988. "Parimutuel Betting Markets: Racetracks and Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 161-174, Spring.
- Joseph Golec & Maurry Tamarkin, 1998. "Bettors Love Skewness, Not Risk, at the Horse Track," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 205-225, February.
- Woodland, Bill M & Woodland, Linda M, 1991. "The Effects of Risk Aversion on Wagering: Point Spread versus Odds," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 638-653, June.
- Clemon, Robert T & Winkler, Robert L, 1986. "Combining Economic Forecasts," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 39-46, January.
- Asch, Peter & Malkiel, Burton G & Quandt, Richard E, 1984. "Market Efficiency in Racetrack Betting," The Journal of Business, University of Chicago Press, vol. 57(2), pages 165-175, April.
- Sauer, Raymond D, et al, 1988. "Hold Your Bets: Another Look at the Efficiency of the Gambling Market for National Football League Games: Comment," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 206-213, February.
- Gray, Philip K & Gray, Stephen F, 1997. " Testing Market Efficiency: Evidence from the NFL Sports Betting Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1725-1737, September.
- Bruno Jullien & Bernard Salanie, 2000.
"Estimating Preferences under Risk: The Case of Racetrack Bettors,"
Journal of Political Economy,
University of Chicago Press, vol. 108(3), pages 503-530, June.
- Bruno Jullien & Bernard Salanié, 1997. "Estimating Preferences under Risk : The Case of Racetrack Bettors," Working Papers 97-39, Centre de Recherche en Economie et Statistique.
- Avery, Christopher & Chevalier, Judith, 1999. "Identifying Investor Sentiment from Price Paths: The Case of Football Betting," The Journal of Business, University of Chicago Press, vol. 72(4), pages 493-521, October.
- Fomby, Thomas B & Samanta, Subarna K, 1991. "Application of Stein Rules to Combination Forecasting," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 391-407, October.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:9422. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.