Sports betting and economic markets have a lot in common. The wisdom of the crowd determines prices and markets are so efficient that it is difficult to outperform. Financially, a marketplace in which it is tricky to stay incorrectly priced because the cost of effort is said to be “proficient.” The market is proficient thanks to the “wisdom of the ample”. James Surowicki points out in his book “The Wisdom of the Crowds”, evidence from many fields is that, under the right state of affairs, large groups of people are collectively smarter than individual experts when it comes to problem solving, decision making, innovation, and forecasting. . The four prerequisites of the wise group are (1) diversity of opinion, (2) independence of members from one another, (3) decentralization, and (4) a sound way of gathering opinions.

Ample evidence supports the view that although financial markets are not completely efficient, they are highly efficient and less active managers are able to generate a statistically significant alpha than might be accidentally predicted. The annual S&P Active Versus Passive Scorecard has demonstrated this for nearly 20 years. The reason is because of the four conditions for the dominance of crowd discretion in financial markets.

Financial markets are not the only ones that are extremely competent. The betting market has long been seen as a test ground for the Eugene Fama (EMH) effective market hypothesis. Testing for EMH is easier in the betting market than in the regular financial market as there is a fixed point in time when the stake is announced, i.e. H. when an event ends. Since most of us don’t know anyone who has made a fortune playing sports betting, we intuitively know that the sports betting market is effective. However, intuition is often wrong. Having evidence to back up your intuition will go a long way. However, before we look at the evidence, we need a definition.

Point distribution and random error

An “impartial rater” is a statistic that averages neither too high nor too low. Estimation methods do not always provide realistic estimates, but errors in both directions are likely to be the same. It turns out that the point distribution is an unbiased assessment of the outcome of a sports event – although it is not expected to be true in every case, if not true, the error is randomly distributed with a mean of zero.

What is the relationship between the sports betting market and investment? 

As we have seen, despite the fact that some amateurs fix prices on the sports betting market, it is difficult to find usable price mistakes. In the investment world, where about 90% of all trades are carried out by large institutional traders, these sophisticated investors set prices, not individual amateur investors. With professionals (not amateurs) dominating the market, competition is certainly tougher than in the sports betting market. And we’ve seen how difficult it is to win this game. Whenever someone buys or sells stock, they have to take into account that they are in competition with these large institutional investors. It also has to admit that institutions have more resources. That way, they are more likely to be on the right side of the business and individual investors on the wrong side. This is what the evidence shows.