Chapter One, Part III

Truly successful decision making, of course, demands more than just a picture of the world as it is. It demands in addition a picture of the world as it will (or at least as it may) be. Any decision-making mechanism therefore has to be good under conditions of uncertainty. And what's more uncertain than the future? Group intelligence may be good at telling how many jelly beans are in a jar or remembering the year Nirvana released Nevermind. But how does it perform under conditions of true uncertainty when the right answer is seemingly unknowable—because it hasn’t happened yet?

Robert Walker’s entire career depends on the answer to that question. Walker is the sports book director at the Mirage Hotel and Casino in Las Vegas, which means that every week he fields thousands of bets in sports ranging from pro football to Ivy League basketball. For all those games, Walker has to offer a line (or point spread), which lets bettors know which team is favored to win and by how many points. The way the tine works is simple. Say the Giants are favored this week by three and a half points over the Rams. If you bet on the Giants, they have to win by four points or more for you to win the bet. Conversely, if you bet on the Rams, they have to lose by three points or less (or win), for you to walk away with the casino’s money. In other sports, bets are framed in terms of odds: if you bet on the favorite, you might have to put down $150 to get $100 back, while if you bet on the underdog, you’d have to lay down $75 to win $100.

As a bookmaker Walker's job is not to try to pick what team will win. He leaves that to the gamblers, at least in theory. Instead, his job is to make sure that the gamblers bet roughly the same amount of money on one team as on the other. If he does that, then he knows that he will win half the bets he’s taken in and lose the other half. Why would Walker be satisfied with just breaking even? Because bookies make more money on every bet they win than they lose on every bet they get wrong. If you place a point-spread bet with a bookie, you have to put up $11 to win $10. Imagine there are only two bettors, one who bets on the favorite and the other who bets on the underdog. Walker takes in $22 ($11 from each of them). He pays out $21 to the winner. The $1 he keeps is his profit. That slim advantage, which is known as the vigorish, or the vig, is what pays the bookie’s bills. And the bookie keeps that advantage only when he avoids having too much money riding on one side of a bet.

To keep that from happening, Walker needs to massage the point spread so that bets keep coming in for both teams. ‘The line we want is the line that’ll split the public, because that’s when you start earning that vig,” he said. In the week before the 2001 Super Bowl, for instance, the Mirage’s opening line had the Baltimore Ravens favored by two and a half points, But soon after the line was posted, the Mirage booked a couple of early $3,000 bets on Baltimore. That’s not much money, but it was enough to convince Walker to raise the point spread to three. If everyone wanted to bet on Baltimore, chances were the line wasn’t right. So the line moved. The opening line is set by the bookmaker, but it shifts largely in response to what bettors do—much as stock prices rise and fall with investor demand.

In theory you could set the opening line wherever and simply allow it to adjust from there automatically, so that the point spread would rise or fall anytime there was a significant imbalance between the amounts wagered on each side. The Mirage would have no problem doing this; its computerized database tracks the bets as they come in. But bookies place a premium on making the opening line as accurate as possible, because if they set it badly they’re going to get stuck taking a lot of bad bets. Once a line opens, though, it’s out of the bookie’s hands, and a game’s point spread ends up representing bettors’ collective judgment of what the final outcome of that game will be. As Bob Martin, who was essentially the country’s oddsmaker in the 1970s, said, “Once you put a number on the board, it becomes public property”

The public, it turns out, is pretty smart. It does not have a crystal ball: point spreads only weakly predict the final scores of most NFL games, for instance. But it is very hard for even well-informed gamblers to beat the final spread consistently. In about half the games, favorites cover the spread, while in the other half underdogs beat the spread. This is exactly what a bookie wants to have happen. And there are no obvious mistakes in the market’s judgment—like, say, home teams winning more than the crowd predicts they will, or road underdogs being consistently undervalued. Flaws in the crowd’s judgment are found occasionally, but when they are they’re typically like theone documented in a recent paper that found that in weeks fifteen, sixteen, and seventeen of the NFL season, home underdogs have historically been a good bet. So you have to search hard to outperform the betting crowd. Roughly three-quarters of the time, the Mirage’s final line will be the most reliable forecast of the outcomes of NFL games that you can find.

The same is true in many other sports. Because sports betting is a kind of ready-made laboratory to study predictions and their outcomes, a host of academics have perused gambling markets to see how efficient—that is, how good at capturing all the available information—they are. The results of their studies are consistent: in general, in most major sports the market is relatively efficient. In some cases, the crowd’s performance is especially good: in horse racing, for instance, the final odds reliably predict the race’s order of finish (that is, the favorite wins most often, the horse with the second-lowest odds is the second-most-often winner, and so on) and also provide, in economist Raymond D. Sauer’s words, “reasonably good estimates of the probability of winning.” In other words, a three-to-one horse will win roughly a quarter of the time. There are exceptions: odds are less accurate in those sports and games where the betting market is smaller and less liquid (meaning that the odds can change dramatically thanks to only a few bets), like hockey or golf or small-college basketball games. These are often the sports where professional gamblers can make real money, which makes sense given that we know the bigger the group, the more accurate it becomes. And there are also some interesting quirks: in horseracing, for instance, people tend to bet on long shots slightly more often than they should and bet on favorites slightly less often than they should. (This seems to be a case of risk-seeking behavior: bettors, especially bettors who have been losing, would rather take a flyer on a long shot that offers the possibility of big returns than grind it out by betting on short-odds favorites.) But on the whole, if bettors aren’t collectively foreseeing the future, they’re doing the next best thing.

Previous section

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