3 November 2009
Football pseudomarkets overreacting, again?
Posted by QuikSand under: Prediction Markets .
The New Orleans Saints ran their record to 7-0 by beating Atlanta in a nationally televised Monday Night Football game. The pseudomarkets at WSEX have predictably anointed them as the heavy favorites to win, at least, the conference championships.
We have previously discussed comparable markets for season-long outcomes in baseball. Most of the same logic applies in football, with one important exception — the outcome at hand is one of a single-elimination playoff of at least two events. Our general conclusion here is that these markets tend to overweight the predictability of these series of events.
Currently a share of New Orleans to win the NFC sells at WSEX for $40. Recall, this is not a market as to who will be the #1 seed for the conference playoffs… it’s the actual outcome of the playoff games themselves. So, in abbreviated fashion, we are wagering that the Saints will:
-qualify for the playoffs and get themselves (through a bye or a win) to the round of four remaining conference teams
-win the first playoff game, likely against a quality team that has already won a playoff game itself
-win another playoff game, definitely against a team that is either a strong team, or a “hot” one having won at least one playoff game already
Buying this at $40, even if we feel confident that New Orleans is truly the best team in the conference, seems like a poor wager. Trying to assign off-the-cuff probabilities to the market here makes this an arithmetic exercise in independent probabilities… I’ll give it a first stab:
P(make the round of 4 NFC teams) = 75%
P(win divisional playoff) = 75%
P(win conference championship) = 70%
I’m trying to be pretty charitable here… setting the chance of a collapse (due to injuries or otherwise) at nearly zero, basically advancing the balance of the regular season as a near-given, and installing the Saints as a pretty heavy betting favorite in each of their two conference playoffs. That seems fairly liberal, I’d think… especially given how frequently we have seen the “best looking” NFL team at around Halloween look a lot less impressive come January of the same season. But even with all those charitable assumptions…
Still not a good bet.
P(all three above events) = 0.80 * 0.75 * 0.70 = ~0.393
Bottom line here is that betting the favorite in these markets is generally a poor wager. It’s not a winner in terms of actual odds for the eventual payoff, nor is there much opportunity for the price to escalate a lot more as the season progresses. The “market” has already built in an expectation that the Saints are going to make the playoffs as a top seed (more or less) — them winning their next three games can’t really add too much strength to that perception, but two losses or an injury to their likely-irreplaceable QB Drew Brees certainly could send that price in the wrong direction.
One Comment so far...
Worthwhile Money » Packers and Eagles Worth A Look in NFC Says:
9 December 2009 at 3:53 pm.
[...] Right now, the teams combine for a $73 buy price on the WSEX market. As we have noted before, there is probably some overvalue at the top of this pseudomarket. In fact, if you recall, the season opened with several teams seen as legitimate choices to win the [...]