Daniel Sutter: Should we exercise the freedom to bet on sports?

0
42
sports betting

Daniel SutterFour states have already legalized sports betting in the wake of last May’s Supreme Court decision. While many Alabamians have moral objections to gambling, economics also provides a reason not to bet on sports, namely that betting will be unprofitable. And this illustrates an important aspect of financial markets in general.

To understand the likely unprofitability of betting, let’s consider the most common football bet, one against the point spread. One team is favored by a given number of points and must win by this number to win a bet; the underdog wins by winning or losing by less than the spread. Bets against the spread should be fair, meaning that the favorite and underdog should be equally likely to win. Bets are not quite fair because sportsbooks deduct a fee so they can make money.

Despite the fees, sports bettors who pick all winners will make handsome profits. And if you think you know football, you might think you can pick winners for at least some games. But sports’ entertaining unpredictability also makes picking just winners impossible. And because of the betting lines, you cannot profit by just betting on the Alabama Crimson Tide, who win almost every game.

If point spreads are accurate, bettors will not be able to pick enough winners to profit. Accuracy does not mean that the spread exactly predicts each game, but is better at forecasting outcomes than any other method.

Is this really true? Dozens of published papers have found that sports betting lines accurately predict outcomes. Alternatively, economists try to find profitable betting strategies given the sportsbooks’ fees; the published research yields few winning formulas.

Accurate point spreads yield a surprising implication: experts should not do any better than amateurs or luck in picking winners. Flipping a coin to decide who to bet should be as reliable as a super handicapper’s “lock of the year.”

This theory of efficient financial markets was first developed for the stock market. The price of a company’s stock should be our best forecast of its future performance. Some stocks clearly deliver tremendous returns: a $1,000 investment in Amazon or Netflix in 2007 would have been worth $12,000 and $51,000 respectively a decade later. But who knew to invest in Amazon in 1997, Apple in 1978, or General Motors in 1920? Warren Buffet passed on investing early in Amazon.

How do financial markets accomplish this? Once markets exist for stocks, bonds, sports bets, gold, Bitcoin, or anything else, millions of investors can invest where they see value. If you think that Amazon’s stock is still underpriced, then buy now. Of course, someone will only sell to you because they do not think Amazon is undervalued at today’s price. Stocks, gold, and football point spreads must all be priced to balance the number of buyers and sellers most of the time.

One guiding principle for financial research has been that it cannot be easy to get rich. If it were easy to get rich and remained so over time, then everyone would be rich. A satisfactory theory of financial markets must reflect this reality. Prices generally quickly incorporate news affecting a company’s or team’s prospects.

Why then bet on sports? Some people enjoy having action on games and sweating their bets. Betting on your favorite team can also signal your loyalty. Finally, some people, I think, like the challenge of trying to beat the market by finding some heretofore unrecognized pattern. Market efficiency does not mean that nothing remains to be learned about teams’ performance.

The potential to make money in stock, bond, futures, and foreign currency markets motivates similar efforts by analysts on Wall Street and across the world. This research further improves financial markets.

Even should Alabama legalize sports betting, I won’t be placing many bets. I would be denying the power of markets if I did. Studying economics pays off, sometimes just by avoiding unprofitable decisions.

•••

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.