OutFront
Super Bowl Science
Ira Carnahan, 01.06.03

Sometimes sports bettors are no more rational than stock
investors.
Do you plan to bet on the Super Bowl? A
growing body of academic research suggests that while the sports betting market,
like the stock market, is mostly efficient, the psychological biases of bettors
create some anomalies--and openings for profit.

That's the view of Justin Wolfers, who worked in the
Australian bookmaking industry before getting his Harvard Ph.D. and now teaches
"Finance, Behavioral Economics and Sports Betting" at Stanford's business
school. Still, he warns, it's tough to come out ahead, both because professional
gamblers often act as arbitrageurs, thus reducing anomalies, and because
transaction costs are so high. Here are some tips from the research of the
gambling dons.

• Bet against
suckers

When you wager on a game,
you're not betting against your bookie--who usually strives to maintain a line
that will draw an even balance of bets--but against fellow bettors. If more
bettors favor the New Orleans Saints, the bookie moves the line, requiring the
Saints to win by a bigger and bigger margin (even an improbable one) until
enough bettors take the other side.

Where
can you find suckers to bet against? Hugely popular events like the upcoming
Super Bowl, where an estimated 90% of bettors are unsophisticated, offer one
opening. Even in regular season play, the betting on National Football League
games is generally considered less sophisticated than betting on baseball, which
has a large group of numbers-obsessed fans.

College football is another promising venue, but for a
different reason, says Wolfers: Many games draw relatively limited attention,
and those fans who do bet may have strong team loyalties that can lead them to
take bad bets. The office is another good place to bet, provided you won't get
fired for it. The Wharton School's Andrew Metrick found bettors in NCAA
basketball tournament pools put too much on first seeds and local teams and too
little on second and third seeds and out-of-towners.

• Keep costs low

First rule: Stay away from the ponies. Horse betting is legal
in 43 states, but it's the most expensive sports bet. Tracks typically keep 15%
to 25% of each pot. By contrast, Nevada bookmakers last year kept only 4.5% of
the pool in football, 5.5% in basketball and 3% in baseball. Betting on these
sports is generally legal only in Nevada. While illegal bookies obviously don't
report their holds, they appear to work on roughly similar percentages.

• Take the long view

NFL bettors tend to overreact to teams' recent performances
while ignoring their longer-term records, a 1997 study in the Journal of
Finance found. So there's a profit opportunity for bettors willing to take a
chance on teams that have struggled recently. Bettors also tend to overestimate
the significance of games with lopsided scores and those with an unusual number
of fumbles, interceptions or penalties. While turnovers and penalties are
important--they explain about 40% of the point difference between teams--they
reveal less than bettors believe about a team's prospects in future
games.

• Bet against the home
team

A new study finds that local
illegal bookies offer odds nearly identical to the legal odds in Las Vegas with
two exceptions. First, local bookies often offer worse odds on the home team,
reflecting the bias of local bettors. Some local bookies also use their
knowledge of bettors' past wagers to price-discriminate: If your bookie knows
you would never bet against a certain team, he might feed you a sucker bet. One
way to avoid such problems is to bet over the Internet. This is illegal or at
least questionable, depending on where you live. But if you choose to do it
anyway, Wolfers suggests checking out www.sportsbook.com, www.willhill.com,
www.centrebet.com and www.betfair.com.

• Don't go for broke

Horse players regularly put too little money on the favorites
and too much money on long shots, studies show. This produces a dramatic skewing
of potential returns; one study found that when the odds on a horse reach
30-to-1, the expected return on a $1 bet is about 60 cents. When the odds exceed
100-to-1, it falls to a mere 14 cents.

Intriguingly, the tendency of horse players to put too much
money on long shots is especially strong during the last couple of races of the
day. Apparently, folks who've lost earlier are trying to make it up with a big
score before heading home.