Despite the term “wisdom of crowds,” not all crowds are wise. While collective judgment can yield a startlingly accurate estimate, a mob mentality can lead to financial panics, bubbles, and other mass delusions. James Surowiecki’s bestselling 2004 book, The Wisdom of Crowds, makes this point explicitly:
“Collective decisions are most likely to be good ones when they’re made by people with diverse opinions reaching independent conclusions relying primarily on their private information,” Surowiecki writes.
Some gambling influencers have tried to apply the wisdom of crowds to sports betting and parimutuel pools, usually unsuccessfully. The wisdom of crowds by itself doesn’t make “odds more efficient” or counteract the uncertainty inherent in predicting future events. A crowd’s success in predicting depends on the crowd’s independence of mind, which is undermined by the structure of sportsbooks, parimutuel pools, and gambling in general.
In an interview with Gaming Today, Surowiecki unpacked the predictive flaws with sports betting and parimutuel horse racing. While parimutuel wagering has improved predictive capabilities, it shares some of the same flaws that undermine the wisdom of betting crowds.
What Makes A Crowd Wise?
The wisdom of crowds posits that a properly structured group can make a better estimate collectively than the group’s most intelligent or expert individuals.
In his book’s first chapter, Surowiecki cites a finance professor who ran a wisdom of crowds experiment in his class. Jack Treynor asked his class to guess the number of jellybeans in a jar. The jar held 850 beans, and his class’ estimate was 871.
“Only one of the 56 people in the class made a better guess [than the group],” Surowiecki wrote.
However, the group was so close to reality for a few reasons. The students didn’t know what every other student had guessed, so they had to rely on their own information, even if all they had was their intuition instead of extensive jelly bean counting experience.
Each student was free to come to their own conclusions, securing two vital attributes of wise crowds: cognitive diversity and independent opinions. Having both attributes in a group ensures that members of the group don’t make the same mistakes as one another.
“As long as the errors people are making aren’t correlated with each other, then the collective intelligence of the group can still be quite high,” Surowiecki said.
A crowd in which individuals are free to make their own mistakes can cancel individuals’ egregious mistakes out and move the final estimate to something closer to reality. Gambling platforms undermine this independence of mind in ways that reduce their predictive power.
Payouts and Public Opinion: Sports And Horses
Sports betting and parimutuel betting reveal the preferences of the “crowd” to some extent.
Oddsmakers adjust sportsbook odds based in part on the amount of money bet on each side. Instead of reflections of probabilities, the odds become skewed by oddsmakers ensuring their liabilities aren’t too high on one side of the line or the other.
“The most pertinent question when it comes to betting is, ‘Are you interested in the number of bets on [each] side, or is it the total dollar sum that you’re interested in?’” Surowiecki said.
“That’s kind of a complicated question because the virtue of thinking of it in terms of dollars [is] you can say you have dollars balance on both sides, dollars are presumably – they’re to some degree – a measure of intensity of preference…On the other hand, [the] obvious fact is some people are just richer than others, and therefore, they bet more. It doesn’t necessarily mean that they’re more invested or have more information or whatever it is.”
Parimutuel pools suffer from the same flaw: dollars don’t necessarily translate to probabilities or signal how much information a bettor has. Bettors on sports and horses often fall for this mistake, especially when they assume that sharp bettors are the ones moving the lines.
Sharp Bettors and Horse Racing Odds
In sports betting, bettors are locked into the odds they choose. Parimutuel odds depend on a pool of money, so every bettor gets the same odds on the horse they bet on.
Consequently, sports betting patterns among sharp bettors are different at sportsbooks and horse tracks. While professional bettors hope to lock into the best odds at sportsbooks, sharps rarely place their bets before post. Knowing the potential payout on a wager is a key piece of information for a professional, and horse track odds are ever-changing until the start of the race.
“A sharp horse bettor who bets at any time other than just before post gets what they deserve,” professional sports bettor, Captain Jack Andrews, said.
Sharp Bettors at Sportsbooks
As for sportsbook odds, Andrews offers three main reasons sportsbook odds don’t translate to probability values. Public bettors don’t know how sharps are approaching a market. If the Cowboys open at -6 then move to -7.5, bettors don’t know which spread sharp bettors put all their money on.
Bettors often falsely assume that sharp bettors place more money on their bets than casual bettors, consistent with the wisdom of crowds model of wager amount correlating with the intensity of belief.
“They [casual bettors] theorize that sharps bet more, so if there is a large discrepancy between money wagered and number of tickets, it means the large bettors must have bet the big money on one side,” Andrews said. “Trouble is, sharp bettors have trouble getting money down at most sportsbooks, yet those same sportsbooks tout huge wagers from square bettors. So that theory that the sharp money is larger doesn’t hold water.”
Finally, sportsbooks that use sharp bettors to shape their odds don’t disclose which price movements can be attributed to sharps. “The sportsbooks that find signal from sharp bettors, places like Circa, don’t disclose betting information,” Andrews said. “Meanwhile, the sportsbooks that don’t take sharp action are all very willing to tell you.”
Circa Sportsbook refines its odds by releasing odds and waiting to see where the most talented bettors put their money. In contrast, DraftKings’ CEO went on the record about how he “didn’t want professionals” on his company’s sportsbook. Professional sports bettors calculate their own odds and determine whether a sportsbook’s potential payout is sufficient to cover the professional’s risk.
A Bet Isn’t Always a Prediction
Parimutuel pools remove the oddsmakers’ influence and are better prediction models than sportsbooks. Unfortunately for those looking for prediction markets, parimutuel bettors can still be swayed by the available odds rather than their best guess at the winner. The potential payout may be enough to bet on unlikely picks instead.
In The Wisdom of Crowds’ notes section, Surowiecki elaborates on a study of horse races at the Aqueduct and Belmont Park racetracks in 1970. The study’s authors, Arthur Hoerl and Herbert Fallin, wanted to know whether horse racing odds could predict how often horses won. The results were surprisingly accurate.
“Take, for instance, the 312 races run that year in which seven horses ran,” Surowiecki wrote. “In those races, the favorite was predicted to win 33 percent of the time. It won 34 percent of the time. Second-place horse: 22 percent predicted, 21 percent real.”
The full results of the seven-horse races were within two percentage points or matched the final outcomes of the season’s races. While parimutuel pools’ predictive power was impressive over the whole season, it’s little help for bettors interested in winning bets on the individual races they put money on.
Wisdom Of Crowds
Sportsbook odds and corresponding probabilities aren’t precise measurements of bettors’ predictions about final scores, spreads, or wins. Horse track wagers have predictive power over a season, but they don’t provide a special insight into individual games bettors may attend or bet on throughout the racing season.
Parimutuel betting may improve the predictive power of sportsbooks, but there are still flaws in its predictive power in individual events. Prediction market platforms likely have more predictive power.
Platforms like Sporttrade, which allow real-time trading and force users to convert their intuitions directly into probabilities, are more likely to have predictive power in individual sporting events. What’s certain is that commercial gambling odds aren’t designed for predicting outcomes.