WISDOM OF CROWDS

I have deliberately kept mathematical “proof” and academic rigour of the theories of Wisdom Of Crowds and the related Efficient Market Hypothesis out of this article. Those that are interested can easily research further their efficacy on-line. For interest, I believe both theories have limited real world applications, though their usefulness in sporting prediction markets is undeniable.

A brief definition of the Wisdom of the Crowd is that large groups of people are collectively smarter than individual experts at predicting outcomes. To misquote Jeremy Corbyn, “why the many are smarter than the few”. This is especially true when the crowd is diverse and independent, which is very much the situation in betting markets.

Related to Wisdom Of Crowds is the Efficient Market Hypothesis. The EMH in it’s simplest form suggests that asset prices reflect all available information (and by association, it is impossible to beat the market). The latter conclusion is a stretch of the theory.

The relevance of these theories to betting markets? If we accept the theories at face value, the best approximation of the chance of an outcome would be, in horse racing the Betfair Starting Price (BSP) and in football the Asian Handicap closing lines. That is because those markets are the largest, deepest and smartest markets for those individual sports. The participants in that marketplace are diverse, independent and largely devoid of any “group think”.

In both of these markets there is virtually no margin to account for and so the final prices (once every participant has eventually “voted”) can be readily converted into a percentage chance of that outcome actually happening. A BSP of 2.0 represents a 50% chance, 3.0 represents a 33% chance, 5.0 represents a 20% chance etc. Similarly, Asian Handicap Lines can be converted into % chances for football betting. Numerous empirical studies have shown both to be wholly accurate.

The importance of this knowledge cannot be overstated. It demonstrates the futility of trying to beat the market when it is at it’s most accurate. In plain English, it is arrogant in the extreme to believe you know more than the market at the closing and you will eventually find out that it pays to be humble! If you bet at BSP, the commission is likely to ensure you are a long-term loser (although it is a more favourable strategy than betting with bookmakers at SP with their much higher margins than the exchange commission). If you accept that logic, then it is clear that you should be betting as early as possible, when the market has less participants and is therefore less accurate.

If you want to accurately assess systems, strategies or the records of tipsters/experts then you can also utilise the Wisdom Of Crowds. It is a quicker and faster way to assess than simply looking at a profit/loss account, which can be wildly erroneous. So, traditionally, even those that do their research, will look at a series of results and concentrate on factors such as profit/loss, strike-rate, longest losing run, taken from a set of past results. On the surface this seems logical and sensible. However, the downside is that you will almost certainly be dealing with an inadequate sample size (again, if you need the Maths, then an online check) and even if you have thousands of results, a simple monte-carlo simulation (on line again) will demonstrate the huge variance in results you could experience moving forward.

Using our appreciation of the accuracy of the markets, we can gain a quicker and more accurate guide to how a strategy will perform in the future and in the longer-term. We can ignore profit/loss figures and instead concentrate on how the selections (winners and losers) perform against the market. There are a few criteria you could apply but a simple method is demonstrated below;

Two figures you require are the price at which the selection is advised and the eventual BSP. Then it is a simple comparison. If a horse is advised at 10/1 (11 digital odds) and the bsp is 7.0, then that would be assessed as +4 (11-7). Similarly a horse advised at 8/1 (9.0) and the bsp is 9.0 would be assessed as 0 (9-9) and a horse advised at 12/1 (13.0) that has an eventual bsp of 18.0 would be -5 (13-18). After as few as 50 bets you would get a good reading of the number of selections that are positive as opposed to negative, and, the running total would give an indication of the magnitude of the long-term profits/losses that are likely. The actual results and profits/loss are largely irrelevant as they may just reflect either a favourable or unfavourable run of winners/losers.

The next logistical step is to assess how easy / difficult it is to secure early prices and to factor in the concessions of “best odds guaranteed” and “extra places” or betting into exchanges at the sweet spot of adequate liquidity, small overrounds, but before the bulk of money arrives. Those are topics for other articles……