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Using the Home-Underdog Theory to Test the Efficiency of NFL Sports Gambling Market

by: @djlo4422

NFL sports gambling markets are efficient if one strategy is not consistently profitable year after year. The analysis in this paper examines the efficient market hypothesis using the home-underdog theory. The data were collected for homeunderdogs for the last 10 NFL seasons. Important filters were applied to examine potential variations of the home-underdog theory that may be profitable. There was no variation of the home-underdog theory that was consistently profitable year after year. There were 5 different variations that were profitable in the 10 years, but they were not profitable every year. The results provide evidence that the NFL sports gambling markets are efficient. Strategies that are profitable one year will not be in other years as sportsbooks become more aware of them.

“Gambling? Who said anything about gambling? It’s not gambling when you know you’re gonna win.” – Alan Garner played by Zach Galifianakis from the movie “The Hangover.”

Profitable gambling opportunities, like the one described by Alan, were made possible for Iowans with the legalization of sports gambling. Sports gambling markets could be inefficient, which would indicate that a profitable gambling strategy could exist. A market is efficient when one strategy cannot consistently beat the market. According to Levitt (2004), bookmakers set distorted prices that take advantage of bettor biases in order to maximize profits, but very few bettors are able to consistently exploit the sports gambling markets. Wever and Aadland (2012) found that bettors exhibit herd behavior on the best-known elite teams, so large underdogs were underpriced because of the herd behavior. These studies agree that bettors have clear biases, and bookmakers take advantage of these biases. If true, there is true inefficiency in the sports gambling markets. This research article uses something called the home-underdog strategy to test the efficient market hypothesis of the sports gambling market.

Legalization of Sports Gambling

In 2018 the Supreme Court removed the Professional and Amateur Sports Protection Act, which was first enacted in 1992 (Liptak and Draper 2018). The initial federal law prevented every state from legalizing sports gambling. Since the federal law was repealed, 20 states, including Iowa, and Washington D.C. have legalized sports gambling (Rovell 2020). 8 states are expected to legalize sports gambling by the end of 2020. 12 states are projected to legalize sports gambling by the end of 2021. The remaining 10 states are expected either never to legalize sport gambling or only do so after 2022. The majority of states (40 out of 50) will most likely legalize sports gambling by 2021.

C. How Do Sportsbooks Operate?

The vig charged on every bet is the basis for sportsbooks making a profit. According to the balanced-book hypothesis, the number of bets are equal on both sides of the line. For example, each side of the line is paying $110 to win $100. The winning bettors are paid $100 from the losing bettors’ wager of $110 ($110 – $100 = $10). The sportsbooks retain the $10 on all losing wagers. If there are 1,000 bets on each side of the line, then the sportsbooks profit $10,000 ($10 * 1,000 = $10,000). The vig is the basis for how sportsbooks operate as a middle man between the losing bettors and the winning bettors. Sportsbooks are not profitable when the result of the game is a push. Both sides of the line receive their wagers back. Sportsbooks profit $0, and bettors profit $0. A push is the worst-case scenario for a sportsbook, because the vig cannot be collected.

D. How Are Betting Lines Adjusted?

Generally, betting lines will change from opening line to closing line. Lines can change in increments ranging from half a point up to double digits. The main reason for the changes in lines is that more information is available by game time. Information can be the number of bets coming in on each side of the line. For example, if 75% of the bets are on one side of the line, then the sportsbooks will adjust the lines to maintain a more balanced book. Information that influences a line the most is whether a specific player is active for the game. Suppose a key player is projected to be active but then ruled inactive before the game; then the lines will adjust accordingly. Similarly, if a key player is projected to be inactive, but the player is ruled active before the game, then the lines will adjust accordingly. Another reason for sportsbooks to adjust their lines is a bet made by a sharp bettor. These changes to the line are known as a sharp line. Sportsbooks tend to keep their lines within one and half points of each other. If sportsbooks do not have similar lines, then the arbitrage strategy known as middling is available to the public.

To read more of DJ’s article, click here.


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