Friday, October 10, 2014

Are Sports Betting Markets Prediction Markets? Evidence from a New Test

Summary
In their paper, Kain and Logan (2011) argue that the sports betting markets are not accurate prediction markets. Kain and Logan examined two or the possible bets made with regards to sporting contests, margin of victory (the line) and over/under (sum of scores), to determine the accuracy of predictions in the outcomes of sporting contests. This study argues that in order for the sports betting market to be an accurate prediction market, it must be able to accurately predict both the sum and difference of scores in sporting contests.

In this study, Kain and Logan examined the predictions and outcomes for NFL, NBA, NCAAF, and NCAABB contests between 2004 and 2010 to determine the accuracy of house predictions. The test was performed by weighing the predicted margin of victory and total score against the actual outcome. The results of the study showed that the margin of victory is an accurate predictor for bettors; however, over/under is not.

Kain and Logan contribute the results of this study to the problematic position those creating the lines are in, for the house is profit maximizer. Casinos and others producing lines for sporting contests are in the business of making money. When they produce a line, they want to have a greater amount of losers than winners, not a 50/50 split. Kain and Logan continue by stating that does not desire to accurately predict the outcome of games, but instead wants to create bettor belief. Finally, Kain and Logan make the observation that there is less money in betting over/unders, therefore, casinos are less likely to invest in developing accurate predictions.

Critique
This study brings to light flaws in sports betting that many tend to overlook. The lines made for sporting contests are made with the interest of making money, not necessarily for making accurate predictions. Because of this, analysts should be wary of taking a great amount of stock in sports forecasting. Studies into the validity of sports betting as an accurate prediction market should be done carefully as accuracy is not valued.


Source
Kain, K. & Logan, T. (2012). Are sports betting markets prediction markets? Evidence from a new test. Journal of Sports Economics.

6 comments:

  1. John,
    Do you see the sports betting industry modifying their stats to use predictive markets? If so, how do you think the industry could benefit from changing and challenging Kim and Logan's work.

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    Replies
    1. I'm not sure I follow your question, Joy. Through their research, Kain and Logan argue that the sports betting industry does not accurately represent a predictive market due to the focus on profits and not accurate estimates. It's not a matter of modifying statistics, but rather purpose.

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    2. I understand Kain and Logans research, however do you think their research is accurate? If so, do you think predictive markets could be utilized in the sports betting industry?

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  2. John,

    Do you see this as an issue facing other types of prediction markets (such as national security) or primarily an issue facing sports markets?

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    Replies
    1. Harrison, I only see this as an issue if the purpose of the market is compromised. In the case of sports, the purpose of many making predictions is to get more people to bet, not creating accurate estimates.

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    ReplyDelete