bettingmarket
What is a betting market?
A betting market is a marketplace in which individuals bet on the outcome of discrete events (Each event occurs at a particular instant in time.)
In a traditional betting market, comprising bookmakers and punters, an oddsmaker will construct a list of possible outcomes, assess how likely each one
is to occur and ascribe a probability to each. People subsequently speculate (bet) on the basis of their beliefs and knowledge and the market price that finally emerges constitutes an aggregate opinion, incorporating all of the information available to each of the participants at a given point in time. Each bet
contains a well defined end point at which time its value is revealed.
Bookmakers are not involved in the prediction business, it is their aim to reduce risk and to maximise profit. In a five horse race, a bookmaker may choose to price up each horse at odds of 4/1 (5.0). In such a scenario, were he to take an equal amount of money on each runner, he would break even, as each horse would have a 20% chance of winning. In that the five runners have combined implied "probabilities" of winning of 100%, we are dealing with a "round" book.
Horse | Odds | Percent |
A | 5.0 | 20 |
---|---|---|
B | 5.0 | 20 |
C | 5.0 | 20 |
D | 5.0 | 20 |
E | 5.0 | 20 |
over-round | - | 100 |
If however, he were to price up each runner at 3/1 (4.0), the implied probabilty of each runner winning will change to 25% from 20%. If he were again to take an equal amount on each runner, he would receive five units and pay out four. The profitable extra unit amounts to 25% and 25% x 5 = 125%. His book would be 25% "over-round".
Horse | Odds | Percent |
A | 4.0 | 25 |
B | 4.0 | 25 |
C | 4.0 | 25 |
D | 4.0 | 25 |
E | 4.0 | 25 |
over-round | - | 125 |
The over-round (Vigorish, or simply "vig", or "juice") is what gives the bookmaker his profit, his sun tan and his cigars. If the over-round is 120% the bookmaker will expect to pay out 100 pounds for every 120 pounds he takes in, yielding him an expected profit of 20/120 = 16.7%.
How well does the betting market predict the order of finish in a horse race? According to data compiled by Asch, Malkiel and Quandt (1982), the answer is very well indeed. The following table compares the subjective probability of a horse winning the race (as derived from its price in the betting market) with the objective probabilities of winning derived from actual experience.
It can be seen from the table that the subjective odds of the betting market do a good job at predicting the true overall objectives. Favourites do have the highest objective probability of winning. Second favourites have the second highest objective probability of winning and so forth.
What the table also highlights is the previously observed tendency that favourites will be underbet and longshots overbet. It can be seen that the objective probabilities of the favourite winning (0.361) is actually higher than the subjective probabilities (0.325) as estimated by the betting market. Conversely, the subjective estimates for longshots winning are well above the objective probabilities of winning.
In the words of the authors; long shots seem to go off at lower odds (higher subjective probabilities of winning) than their true objective probabilities of winning would seem to warrant.
These results are consistent with the view that punters are risk takers.
Subjective and Objective Probabilities of Winning
Favourites* | No of races | Obj. Prob | Subj.prob | Subj.prob.-obj.prob |
---|---|---|---|---|
1st | 729 | 0.361 | 0.325 | -2.119 |
2nd | 729 | 0.218 | 0.205 | -0.903 |
3rd | 729 | 0.170 | 0.145 | -1.972 |
4th | 724 | 0.115 | 0.104 | -0.961 |
5th | 692 | 0.071 | 0.072 | 0.074 |
6th | 598 | 0.050 | 0.048 | 0.279 |
7th | 431 | 0.030 | 0.034 | 0.480 |
8th | 289 | 0.017 | 0.025 | 0.480 |
9th | 165 | 0.006 | 0.018 | 2.095 |
Source: Asch, Malkiel and Quandt. (1982).
Whilst it is true, that in the case of horse race betting markets, the market displays a predictive ability (principally because the market contains insiders who ensure that riskfree rewards do not pertain) it is a common error for people to mistakingly anthropomorphise the entire betting market, and to ascribe to it a predictive ability that it simply does not have.
Betting market probabilities, as we have already seen, are the product of an interaction that is taking place between many actors, and not the belief of a single all knowing agent. And whilst it is true that some betting markets display a predictive ability, it is a gross mistake to project a degree of consistency and foresight onto betting markets where it simply does not and cannot exist (political betting markets spring to mind).
Gamblers are human and are accordingly prone to unpredictable behaviour, to overreaction, to mania and to panic. We can know what might happen, but it is rare that we can actually know what will happen Betting market probabilities are not deterministic, they tell us how likely an event is to occur, but not that it is going to occur. As those who told us that Hillary Clinton had a 99% chance of winning the U.S. Preisdential election know only too well, there can be a very big difference between probability and outome. Even the most likely event can fail to happen.
The rational expectations model posits that participants in a betting market have equal access to information and accordingly form their expectations about
future outcomes in a uniform, rational manner based on and around the true
probability of the list of outcomes. The clear implication being that punters incorporate all available information in their analysis of the betting market and that they are able to do this efficiently because
they have a full understanding of the economic models that underpin betting markets.
It is of course acknowledged that some agents are not rational and that mispricing does occur, however, it is said that such mispricing will be corrected through arbitrage. In effect, eroding any possibility of consistently beating the market and earning riskless returns.
We have found, contrary to the efficient market hypothesis , that mispricing can and does persist alowing the possibility of a riskless return. What our
research clearly indicated is that participants in the betting market do not always incorporate all of the available public information. In simple terms, and contrary to much of the academic literature on the subject, there is such a thing as a free lunch, but it is very much a case of knowing where to locate it.
Match | League | Prediction | Betfair | Bookmaker | Best Odds | Mean/Median | Outcome | Stake/Profit | |
---|---|---|---|---|---|---|---|---|---|
CSM Scolar Resita vs. FC Viitorul | Romanian Cup | 2 | 1.71 | William Hill | 1.55 | 1.42 / 1.40 | 2-4 | £100/71 | |
Kardemir Karabuk vs. Keciorengucu | Turkish Cup | 1 | 1.41 | Betway | 1.36 | 1.24 / 1.24 | 3-1 | £100/36 | |
1860 Munich v Bayreuth | Regionalliga Bayern | 1 | 1.44 | Betway | 1.35 | 1.26 / 1.25 | 3-0 | £100/44 | |
Hapoel Kfar Saba v. Hapoel Tel Aviv | Leumit League | 2 | 2.85 | Betway | 2.70 | 2.30 / 2.31 | 0-1 | £100/185 | |
Bangor City v. Aberystwyth | Welsh Premier League | 1 | 2.00 | Betway | 1.83 | 1.65 / 1.62 | 3-2 | £100/100 |
To cite this article: Niall O'Connor What is a betting market?
(Published on Bettingmarket.com 2017. All Rights Reserved.)