Thanksgiving Day NFL Gamblers–Take Notes!

Thanksgiving Day NFL Gamblers–Take Notes!

November 27, 2014 Research Insights, Behavioral Finance
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(Last Updated On: January 18, 2017)

Efficiency and the Disposition Effect in NFL Prediction Markets

Abstract:

Examining NFL betting contracts at Tradesports.com, we find mispricing consistent with the disposition effect, where investors are more likely to close out profitable positions than losing positions. Prices are too low when teams are ahead and too high when teams are behind. Returns following news events exhibit short-term reversals and longer-term momentum. These results do not appear driven by liquidity or non-financial reasons for trade. Finding the disposition effect in a negative expected return gambling market questions standard explanations for the effect (belief in mean reversion, prospect theory). It is consistent with cognitive dissonance, and models with time-inconsistent behavior.

Alpha Highlight:

This paper examines gambling behavior on Tradesports.com for the 2003-2004, 2004-2005, and 2005-2006 NFL seasons. The main test is the following: “the contract price at any time should represent an unbiased estimate of the true probability of the event occurring.”

So are gambling markets efficient?

No! 

2014-10-20 09_15_24-ssrn-id1540313 (1).pdf - Adobe Acrobat Pro
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

The paper finds mispricing consistent with the disposition effect. The figure above shows that prices are too low when teams are ahead and too high when teams are behind (the data points should fall on the 45 degree line in an efficient market).

So next time you are in Vegas and decide to place a bet, remember this study!


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About the Author

Jack Vogel, Ph.D.

Jack Vogel, Ph.D., conducts research in empirical asset pricing and behavioral finance, and is a co-author of DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His dissertation investigates how behavioral biases affect the value anomaly. His academic background includes experience as an instructor and research assistant at Drexel University in both the Finance and Mathematics departments, as well as a Finance instructor at Villanova University. Dr. Vogel is currently a Managing Member of Alpha Architect, LLC, an SEC-Registered Investment Advisor, where he heads the research department and serves as the Chief Financial Officer. He has a PhD in Finance and a MS in Mathematics from Drexel University, and graduated summa cum laude with a BS in Mathematics and Education from The University of Scranton.


  • evo34

    News flash….the NFL betting market today does not at all resemble what it was 10 years ago.