Beating The Football Odds

Being a contrarian might help

Among the Super Bowl's distinctions is that it inspires more betting than any other single U.S. sports event. According to industry estimates, small and high rollers wagered close to $100 million in Las Vegas this year. Add the bets made legally and illegally in other venues around the country, and the total could well exceed $1 billion.

While that's small potatoes compared with the daily action on U.S. stock exchanges, there are enough parallels between football betting and stock investing to pique economists' curiosity. And a recent article in the Journal of Business by Christopher Avery of Harvard University and Judith A. Chevalier of the University of Chicago poses a question about the football-betting market that is often asked about the stock market--whether it is efficient.

According to efficient-market theory, stock price movements instantly reflect all relevant information and are thus essentially random and unpredictable. (Indeed, stock market investors constantly look for minor inefficiencies, such as the so-called January effect, which they try to profit from.) Instead of prices, Avery and Chevalier apply efficiency tests to movements in point spreads on professional football games.

Point spreads are set by Las Vegas bookmakers when the betting begins a week before each game. A spread adds points to one team's final score for the purposes of determining a winning bet --so if you bet on a team favored by 7 points, and it loses by 6, for example, you still win. The casinos take a 5% fee out of the betting total and try to maintain a spread that causes similar amounts to be bet on both teams. Thus, the spreads are often changed as bets come in during the week in order to balance out the betting--or to reflect new information such as a player's injury.

If the football-betting market is efficient, such changes should be essentially random. Analyzing Las Vegas betting data from 2,300 games from 1983 to 1994, however, the authors identified several factors that enabled them to predict the direction of spread movements in advance.

One is the published opinions of sportswriters and other experts, who apparently influence the betting public even though their predictions are often off base. Others are the teams' records in recent weeks (the so-called hot-hand bias), and prestige variables, such as the fact that one of the teams previously made it to the playoffs.

Not only do these factors tend to foreshadow point-spread changes, but the analysis indicates that such changes are usually misguided--moving the spread farther from the final score than they were originally. In other words, bettors seem to act more out of sentiment than reason.

All this suggests that it's possible to make some money by adopting a contrarian strategy--that is, waiting till the last minute and then betting against point-spread shifts. But the authors find that such a strategy would be only marginally profitable after accounting for the casinos' fee. In sum, the football-betting market appears to be inefficient, but not enough so for investors to capitalize big on its inefficiencies.