Applying Economic Bubbles To Sports Betting

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The subprime mortgage bubble of 2007 shows how irrationality in the market can create profitable investment opportunities.

But has there ever been a similar sports betting bubble?

Read on to find out.

What Is A Bubble?

According to Investopedia:

A bubble is an economic cycle characterized by the rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behavior.

So, relating this to sports betting, bettors find value in the markets when the probability of the event happening is greater than what the odds suggest. 

So, the betting bubble occurs when the value of the bet exceeds its probability.

Subprime Mortgage Profits

Oscar-winning movie “The Big Short” showcased how a couple of people saw the 2007 Financial Crisis coming and shorted the housing market.

Michael Lewis, the author of the original book, said that only 20 parties took advantage of the situation in the entire world.

Jamie Mai and Charlie Ledley of Cornwall Capital were one such firm, with their story featured in The Big Short.

Cornwall Extract From The Big Short

Shorting The Markets

Ok, but why was Cornwall Capital one of only 20 parties to not only see this coming, but also bet against such a clear betting bubble with huge potential returns?

You’d think that, if the market was that efficient, it would have corrected itself…

… right?

Not exactly.

Shorting the subprime mortgage market was not easily accessible.

According to Bloomberg, if it’s not possible to invest and profit from an asset in decline, then the price is determined by the buyer.

So, anyone that was optimistic could have easily bet on its value to keep increasing by buying mortgage debt bonds or buying the houses themselves.

On the other hand, the only accessible way to bet against the housing market was to sell houses and not buy any mortgage debt bonds.

The 2018 Bitcoin bubble was similar; optimists set the market price which led to the asset being over-valued before crashing.

This chart sums it up:

Bitcoin Prices

Now, from a sports investing point of view, we want the opposite.

We want the price to be set by a pessimistic seller.

In other words, we want to find opportunities where the price is “wrong” and there’s no liquidity for correction.

Do Sports Betting Bubbles Exist?

The betting market is usually rational, but on the odd occasion, bubble-like activity does occur.

Mayweather vs, McGregor is the best example.

Here’s a history of Money’s opponents and their odds

Marcos MaidanaWBA Welterweight Champion+805
Miguel CottoWBA Light Middleweight Champion+750
Andre BertoTwo-Time Former Welterweight World Champion+1100
Robert GuerreroMultiple-Time World In Champion In Two Weight Classes+500
Conor McGregorNever Boxed Professionally+492

On the morning of the fight, the odds had Mayweather at -510 ie an 83.6% chance of winning.

Conversely, some bookmakers had Mayweather at -5000 to beat Andre Berto ie a 98% chance of winning. 

In fact, if you go back and look at the implied probabilities for all of Mayweather’s opponents since 2010, only two had a greater perceived chance of winning than McGregor, namely Manny Pacquiao and Canelo Alvarez.

As such, Mayweather was such a clear value bet but sharps didn’t get close to correcting the market – the true odds for Mayweather to win should have really been around -10000.

It’s possible that the sheer amount of money required to overcome payouts on McGregor prevented the correction.

In other words, there just weren’t enough value bets made.

This particular market was dominated by optimistic buyers.

In normal circumstances, sharps would have corrected the inefficiency, but similar to the subprime mortgage and Bitcoin bubbles, there were just too many optimistic people betting on McGregor.

Market Efficiency

Inefficiencies appear when market information is not in sync with the amount of money being wagered.

However, inefficiencies to the extent of those shown by the Mayweather vs. McGregor fight are very rare as sharps usually dictate the lines.

So, it may be better to find situations where sportsbooks get the odds “wrong” early and the market doesn’t need two-way money flow to correct the inefficiencies.

That said, anchoring bias may be the reason why bettors don’t look deep enough.

Stock market traders are not always more knowledgeable that sports bettors, so there could be some value in isolated instances where the market has not corrected.

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