The betting market is efficient and the information advantage is quickly eroded, unlike the stock market. Is it possible to become a successful player using the lessons of hedge fund managers: read on to find out.
What is the efficient market hypothesis?
The efficient market hypothesis is an economic theory that states that information in the market is fully reflected in asset prices. This ensures that generating surplus profits consistently through skill otherwise known as “beating” the market is not possible.
Lessons from the stock market
If we talk about market efficiency, then the stock market is perhaps the most suitable place to search. The efficient market hypothesis has been discussed and studied a lot, and there is evidence that is relevant to rates.
However, unlike long-term stock trading, sports betting is a negative-sum game. That is, the total winnings minus losses in the market are negative due to the bookmaker’s margin. To even maintain the status quo (breakeven), the player must at least defeat another participant in the betting market.
This is very different from the general investment stock market, where all participants can win at once (in case of market growth, which happens all the time). However, there are active participants in the stock market who behave like bettors, namely active investors.
Hedge fund managers, in particular, try to provide value to their clients by beating the market. The fees paid to such managers act almost like the bookmaker’s margin. Investors ditch standard returns and pay to see excess returns.
However, in a comparative study, economists at French and Farma found that only two to three percent of top hedge fund managers demonstrated sufficient qualifications to even cover their costs relative to overall market growth. The others couldn’t even come close.
As one of the Farma experts says: “We do not understand the nature of active investment with a negative amount. No matter how much you win, I will lose, but we both paid to play this game. ”
With the limitation on margin handling (in this case, own fee), the number of hedge fund managers who actually beat the market through skill was minimal and declined over longer periods of time. These are the people who get paid for their investment experience.
The Warren Buffett Problem: Profiting in an Efficient Market
Thus, the facts show that it is almost impossible to win through skill in a truly efficient market. However, one reputable investor questions this trend, namely the famous Warren Buffett.
Since 1965, the S&P 500 (a stock index that basket includes the top 500 selected publicly traded companies with the largest capitalization) has provided an average annual return of 9.7% (including dividends). Over the same time period, Warren Buffett’s Berkshire Hathaway company generated an average share price gain of 20.8% per year, or just over double the S&P 500.
So, if the stock market is really efficient, how is it that Buffett has managed to surpass the double growth of the market year after year? One answer is that he’s just incredibly lucky. Chances are, Buffett’s stance as a mythical investor is simply an extreme example of survival bias.
According to calculations, there is only 0.07% chance that a casual investor can achieve a result as good as Buffett’s or better. However, here we are primarily interested in Buffett’s ability to beat the market at all, given his track record and the low likelihood that another individual investor can match his returns. “The rate at which Berkshire is hitting the market (12.24% on average per year) makes luck an unlikely explanation.”
This statement is interesting because if Buffett’s success is all about skill, in a truly efficient market, an investor like him shouldn’t exist at all.
Is the betting market efficient?
Line closing odds in Pinnacle bookmaker are effective, but it can be argued that the betters’ odds are randomized to the effectiveness of the closing line.
It sounds promising for players to say that stock prices are not correct at all times, but are correct on average. The fact that sports betting hedge funds exist shows that there are ineffective factors in the betting market that need to be exploited.
Unlike their fellow stock brokerage firms, if these firms do not fulfill their obligations, they actually lose money for their (usually very wealthy) clients, rather than “rolling into profits” driven by the growing stock market.
In order to make a profit, these funds are likely to consistently “break” the close, assuming there is room for some profitable value to be found between the opening and closing prices.
Are there odds for the average player?
To make a profit in an efficient market like sports betting, a player probably needs to have better information than the rest of the market, or have a better interpretation of widely available information.
The problem for the average player is that when he bets on a highly liquid game, he is faced with participants with a wider amount of information. The market is often shaped by those who know the most through the backline movement, making it difficult for the average player to succeed here.
However, this does not mean that the average player should be discouraged from trying to create their own long-term profitable strategy. Warren Buffett himself claims to have benefited from competing with “opponents who have been taught that thinking is a waste of time and energy.” These words contain opportunities for those who seek them.
Example of a potentially profitable rate
Below is an example of the actual reasoning behind a series of direct bets on Liverpool to sign Mohamed Salah ahead of the 2017/18 season.
Salah arrived in England without much fanfare, not having time to reveal all his talent at Chelsea, for which he played several years earlier, in a short time. Perhaps that is why some bookmakers were willing to offer a 13.00 odds for Salah to score 15 goals in the Premier League season. That is the number he scored in Rome in his last season. BC Pinnacle offered a 51.00 odds that it would have the best score in the Premier League. This was a great opportunity for players who knew how to use widely available information to their advantage.
The expected goals were less visible at this time, and provided a really handy metric for determining whether or not to bet on the value proposed for the Egyptian’s achievements. Salah’s performance in his previous two seasons in Rome, where he scored 15 and 14 goals respectively, is impressive, especially when you consider that he previously showed more goals each time in the next season.
These raw statistics show that Salah is more likely to score over 15 goals for Roma if he plays around 30 full 90 minute games in a season.
Based on his Serie A stats, this bet offered tremendous value. She could have been transferred to the English Premier League, although it was important to see his new role at Liverpool.
In Rome, Salah nominally played on the right flank, but in fact often occupied more of a striker’s position to the right of the penalty area. At Roma, the attack was primarily focused on winning the laurels of Serie A top scorer Edin Dzeko. The Bosnian showed some potential in accurate passes (0.16 expected passes in 90 minutes), but was primarily a threat to the opponent’s goal (5.25 shots on target in 90 minutes).
As a result, Salah became an excellent assistant for Dzeko. Salah created 22 assists for Dzeko in 2016/17, of which seven were assists only Ousmane Dembele in relation to Pierre-Emerick Aubameyang was a more “profitable” assistant with ten accurate passes.
At the same time, Salah often sacrificed his own ability to shoot on goal in order to provide a better chance for the Bosnian striker. In contrast, at Liverpool, Salah was originally supposed to play against the more creative Roberto Firmino (0.23 assists expected in 90 minutes and 2.92 shots on target in 2016/17).
The preseason was a good indication of what this would mean for the Egyptian. His role was similar to the one he played in Roma, but with a greater emphasis on finding the ball in the back line, and Firmino was more involved in the general game. Salah has become Liverpool’s most advanced player to be trusted to score goals.
This role looked extremely promising for Salah, and one could expect a dramatic increase in his performance. This has been proven in practice: in his first season at Liverpool, the Egyptian scored a fantastic 32 goals in the Premier League.
The problem with finding market inefficiencies
Information is spreading quickly. Finding a player like Salah with the same baseline would undoubtedly be more challenging at this point, even though it’s only been a couple of years.
If, nevertheless, such situations appear, this is actually a great advantage for betters, and you can play with large amounts of money at such rates. They are attractive because low liquidity means inefficiency, but as bankrolls grow, the relative profitability decreases (especially since you will be limited in limits by some bookmakers).
Another problem is the shortage of these types of rates. While Salah may have been misjudged, he could easily have been injured or replaced by someone else having a great season. This is not a repeatable bet, so the advantage found cannot continue over time as it could with a successful model that operates on an individual gaming basis.
While Pinnacle’s line-closing odds are effective for high-bet volume events, there will always be opportunities for adventurous players with the skill and determination to find and exploit inefficiencies in the market.