Pssst: Here’s your mortal lock big kahuna once-in-a-lifetime mortgage the house slam dunk home run guaranteed victory bet of the year: Next time an NFL team that has won and covered the spread over the course of the last three weeks takes the field against a team without its starting quarterback …
“This is the fourth paper I’ve worked on looking at the NFL gambling market, and the first time I brought in my co-authors,” said Corey Shank, an assistant clinical professor of finance at the Farmer School of Business at Miami University. He teamed up with Robert Durand, a professor of finance at Curtin University in Australia and Fernando Patterson, an assistant professor of finance at North Carolina Central University, for their paper, Behavioral Biases in the NFL Gambling Market: Overreaction to News and the Recency Bias.
Here’s the TL;DR version of the paper: Football bettors overreact to recency bias in NFL markets. And while this sounds about right to anyone who bets on sports, the paper went a little bit further to posit the following: The sportsbooks are using recency bias to encourage bets to what they perceive will be the “losing” side. In other words: Forget the trying to balance both sides of the ledger to claim that 10% vig; the books, when they can, are actively using recency bias to get bettors where they want them.
“Due to the vig, the sportsbook has a guaranteed profit if they get an equal amount on each side of the bet,” Shank noted. “But what most gamblers don’t realize is that sportsbooks don’t do that. A few papers I wrote, and a few others written by others, have come very close to showing a lot of support for the idea that sportsbooks can use their expertise to set the lines to make even more money than the vig.”
And in this paper, Shank and company came even closer to cracking the code.
“What we do in this paper is actually show that because gamblers overreact to the outcomes of the last few weeks, the sportsbook can shift the spread a little bit to make even more money than having 50/50 on each side of the bet,” he said.
Bet the dog in this example
But first, backing up to the original portion of the program: What to do when a team comes in hot and is playing against a second string quarterback.
According to Shank’s research, you should take the points and bet the underdog every time. Not because they’re going to win — their research shows quite the opposite, that anytime the second string quarterback takes the field, the odds of winning go south — but because over time, the underdog is going to cover the spread more often than not.
“Over all the situations, the team that lost their quarterback covers the spread a lot more often,” Shank said. “Anything can happen in any one game, but if you had 100 situations, you’d make more money betting on that team no one wants to bet on.”
Furthermore, the research showed bettors were 2.1% less likely to bet on the home team when their first string quarterback was out, and 3.1% more likely to bet on the home team when the visiting quarterback was a backup. These are both consistent with the recency bias theory.
Shank, Durand, and Patterson kept going further, finding that for each previous game the home team covered the spread, bettors were 1.51% more likely to bet on them. And the more points they covered by in recent weeks, the more likely people were to bet on them. This worked in reverse as well; don’t cover the spread, and watch bettors stay away.
And this is all Shank and his co-authors set out to do: To show that recency bias is real, and that bettors will overestimate prior wins and losses, as well as put too much stock in who is behind center.
The reason for the research — in case Shank’s department chair is poking around here — is to take how people bet on sports and apply it to how people invest in the stock market in an effort to educate investors on what not to do. In this case, what “not to do” is depend too heavily on what a stock has done in the short-term.
Each bull market brings in myriad of amateur investors and traders.
Owing to recency bias, they think markets only go up and hence come without an exit plan.
One may get lucky a time or two, but in long run they’ll be slaughtered! pic.twitter.com/Bw6lIK6RlS
— Divyang Vyas (@divyaangvyas) June 17, 2021
“The gambling market is a way to overcome some limitations in studying finance, to see if we still see the same types of behavior in this market,” Shank said. “If you’re buying a stock, we can have data on people that purchase stocks, but it’s impossible to know what they were thinking when they purchased it. Are they trying to purchase this for a week, a month, a year, or 20 years? That’s not something we can ever know when they purchase it. We don’t know what they’re looking for. What’s their expected return? These are pretty big limitations, so we have to make assumptions when looking at investors’ portfolios.
“But when we’re looking at a single bet it’s really easy,” Shank continued. “This football game starts Sunday at 1 p.m., it’s over at 4 p.m. We also know if you bet $110, you either come out with $100 or lose $110. We know exactly what the possible outcomes are. We can use the sports betting market as a proxy.”
And the results of the study confirmed the hypothesis.
“People tend to overreact to things that happen most recently rather than looking at long term trends,” he said.
The dangerous effects of recency bias are amplified by the fact that many real-world systems are mean-reverting. This sets up for large forecasting errors, as people are systematically most confident (due to recent results) right before a reversion event.
— Robert Martin (@robertmartin88) June 22, 2021
And that would’ve been enough for a paper. But their research teased at something else: That sportsbooks are actively using recency bias against bettors.
Sportsbooks know more
OK: This is where having a finance degree would certainly come in handy, but for the sake of simplicity, know this: Shank’s paper shows that bookmakers earn higher returns when gamblers succumb to recency bias — and his theory is that the bookmakers know it.
As an example: Imagine if the Cleveland Browns are on a three-game heater, covering the spread each time. And let’s further say they’re playing host to Dak Prescott-less Dallas Cowboys. The Browns are certainly going to be favored. No one is going to want to be Dallas due to recency bias and the fact they’re down to Garrett Gilbert at QB. (Sorry, Gar.)
According to Shank’s research, the bookmakers are going to goose the Browns number higher. Instead of, say, Cleveland giving 10 points — which may be the “true” spread — the books will set it at -15, knowing full well that recency bias is going to push bettors to the Browns. Shank is supposing the sportsbooks are not, in this case, looking for anything near a 50/50 split on the bets; they want bettors to keep smashing the Browns.
“Even though it should be 10, everyone is still buying at 15, so maybe the books get 55 or 60 percent on the Browns and make extra profit due to bettors’ irrational behavior,” Shank said. “Sportsbooks are always trying to push you in one direction of the bet. And for the most part, they’re going to win when they push you on the wrong side. They’re trying to maximize their profit.”
The paper doesn’t go all the way confirming this; it just appears so based on the data Shank uncovered. And he’s not the first researcher to posit such an idea; it goes back in academic literature to 2004 paper written by Freakonomics author Steven Levitt.
As a result, this is the next paper Shank is working on, setting out to prove what many of us probably assume: That the sportsbooks are a lot better than the gamblers, and that the lines are designed to maximize profits at every turn, not to just to take the vig.
“Just because the spread says -10 doesn’t mean that’s what it should be,” Shank said. “Levitt was one of the first people to suggest that, a few other papers have kind of supported it, but it’s never been shown that, yes, the sportsbooks know more and are actively trying to push bettors to a side. I’m in the early stages of that research.”