Can the Gambling Industry Improve Predictions?

It can be tempting to treat sportsbooks and parimutuel pools as predictive tools. In both types of betting businesses, potential payouts can be converted to probabilities. Many bettors aggregate their beliefs about how likely a spread or other outcome is to occur, and both types of businesses have limited predictive abilities in certain metrics. Superficially, these betting businesses seem to be examples of the wisdom of crowds creating data for useful predictions.

However, sportsbooks and parimutuel pools suffer from serious predictive shortcomings. Sportsbooks have oddsmakers tweaking the odds to manage potential payouts, sometimes adjusting odds to attract money to one side of the line. Parimutuel pools eliminate that meddling, but wagers don’t necessarily match the strength of conviction of the bettors who place them. Well-informed bettors aren’t necessarily the ones who place the largest bets.

Prediction markets add features that improve their predictive power over sportsbooks and parimutuel pools. Companies like Sporttrade are better structured to take advantage of the wisdom of crowds.

Gaming Today spoke to The Wisdom of Crowds author, James Surowiecki, about the shortcomings of gambling predictions and how businesses interested in prediction can improve their predictive capabilities.

Improving Predictive Power Over Sportsbooks

One of the most noticeable things that sets Sporttrade apart from other sports betting companies is its pricing structure. Its bets are priced from $0 to $99. Winning bets pay out at $100. Losing bets pay nothing. Setting a bet’s price equal to its probability helps improve predictive power that Sporttrade may have.

“Obviously, whatever the bettors are doing, it’s a guess in the sense that a bettor doesn’t have any real sense of whether the chance of winning is 68% or 72%,” Surowiecki said. “They have kind of a vague sense in their head of what it is and they know they think it’s 68% and not 32%.”

Photo Contributor: Gorodenkoff

Even though bettors’ intuition is imprecise, setting clear probabilities helps bettors settle on a figure that more accurately reflects how likely they believe an outcome is.

Prediction markets also allow bettors to short the market, dragging the price down when it may be overinflated.

“The fact that you can short the market is also valuable…by essentially forecasting a lower probability so in theory at least, I think that model is one that should improve forecasting accuracy,” Surowiecki said.

At Sporttrade a $70 moneyline wager will have a roughly $30 wager available on the opposing team’s victory. Betting on the other team increases their price and reduces the more expensive team’s price. This allows the information in support of the opposing team to change to new prices. It’s a vital corrective conducted by the bettors rather than oddsmakers.

Predictive Market Shortcomings

Predictive markets aren’t perfect, and there are still shortcomings intrinsic to the model. One of the greatest problems is that the event only happens once. Random chance can still lead a team with a 20% chance to win to defeat the favored team.

“The team that has an 80% chance of winning is not going to win all the time or whatever it is, and so you’re really only going to be able to measure the accuracy of it after the fact and it’s really only going to be able to be measured in aggregate,” Surowiecki said.

Polls that predict elections share this shortcoming. If an election was run 500 times, the candidate with the 60% chance to win would likely win about 300 races. Elections only happen once, so the candidate with the 40% chance can still pull through. It’s a constant shortcoming for people hoping for a foolproof method of divining the future.

The second shortcoming intrinsic to every gambling company is that bettors are influenced by the other bettors around them. One of the keys to a successful wisdom of crowds model is that predictions are made independently and remain uninfluenced by other opinions.

“The key to why collective forests are often good is really that whatever knowledge, whatever it is, is coming out of the individual’s research rather than them simply piggybacking on what everybody else is doing,” Surowiecki said.

No gambling company could hide prices from its customers. However, a prediction-oriented company could open markets that were blind that forced customers to make their own predictions. The disclosures on blind markets would have to be clear, but it would further improve the predictive power of an interested market.

Sports Prediction Markets vs. Political Prediction Markets

Although the CFTC shut PredictIt down in March 2023, legal election betting is available outside of the United States. DraftKings offers US election betting odds in Ontario, Canada, and sportsbooks in the United Kingdom have offered election betting for years. There are important differences between prediction markets on sporting events instead of political events.

“I do think one of the paradoxes of certain kinds of prediction markets, which I don’t think applies to sports betting markets, is that…the more attention that’s given to them, in certain circumstances it actually can drive down the accuracy, because it basically brings in people who are interested in either manipulating the markets or alternatively are in there betting because it reflects who they want to win rather than who they think is going to win,” Surowiecki said.

Audience composition can be a serious issue for prediction markets. For example, a political prediction market that attracts right-wing and libertarian bettors and under-represents liberal or progressive customers will systematically overestimate the performance of right-wing and libertarian candidates.

Sports Betting Markets Don’t Impact Events’ Outcomes

Sports betting prediction markets are also insulated from something that political prediction markets and polls are vulnerable to. The perception that a candidate’s chances are strong can be politically advantageous and attract additional votes to that candidate.

“You saw Republicans really hammering this idea that there was going to be a red wave and they were basically trying to create this feeling of unstoppability that they believed to some extent, but I think it also was…’Oh, this is going to translate into voters thinking [I’ve] got to get onboard,’” Surowiecki said. “And we saw it didn’t happen at all. But in principle, sports betting platforms don’t have to worry about that.”

Sports bettors may be swayed by changes in potential payouts, but no amount of money changes the likelihood of a team winning. The Broncos won’t be more likely to win if they have more money on them than their opponent.

The subject of prediction markets can create new challenges for the company running the prediction market. These challenges stem from that market’s audience and its susceptibility to competing opinions, whether it’s a temptation to go along with the crowd or ideologically rebuffing the majority opinion. These audience composition problems will be front and center for prediction market companies interested in making accurate predictions.

About the Author
Christopher Gerlacher

Christopher Gerlacher

Senior Writer
Christopher Gerlacher is a senior writer and contributor for Gaming Today. He is a versatile and experienced industry expert with an impressive portfolio who has range from political and legislative pieces to sports and sports betting. He's a devout Broncos fan, for better or for worse, living in the foothills of Arvada, Colorado.

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