A few years back I wrote an academic paper that set out to resolve a paradox in sports betting: how could it be the case that bookies systematically got the spread wrong in NFL football? In particular, home underdogs win far more games than they should against the spread. Despite the fact that bookies take a healthy cut of every dollar bet (the “vig”), a bettor who bet on every home underdog for the last two decades would show positive profits. The answer, it turns out, is that bettors have a strong bias against home underdogs. Even though the bookies set spreads that work to the advantage of home underdogs, a disproportionate amount of the money is still bet on visiting favorites. By taking advantage of the bettors’ misperception, bookies greatly increase their profits by setting the “wrong” spread.
This year, I’ve had the chance to put theory into practice. I entered a handicapping contest at www.caribsports.com. Each competitor puts up $250 at the beginning of the year. Each week you need to pick the outcome of five NFL games against the spread. The people who pick the most winners get paid a prize. There were about 800 entrants.
My strategy was more or less to pick every home underdog, although, in most weeks there were not five home underdogs and in a few weeks there were more than five. This year home underdogs have been 47-30 against the spread. Not coincidentally, my record in the handicappers challenge is 49-31. That is good enough to put me in a tie for 7th place out of the 800 participants. Most of the other top scores are bettors who also bet a lot of home underdogs.
Unfortunately for me, the payoff structure is highly skewed, with first place paying $70,000 and seventh place paying “only” $2,500. So I need a great last week to propel me up the standings.
Knowing the top bettors all pick lots of home underdogs, it means that this week I have no choice but to bet against home underdogs. I need to make sure my picks are as different as possible from the picks of the people in front of me. I gain a lot in dollars if I do much better than the people in front of me. If I do much worse, it doesn’t cost me much.