Sunday, April 12, 2009

Reading a Book about Day Trading

I've been reading a book about day trading and its really gotten me thinking about sports betting as a market, the spread as a "price", etc.  

I also had a very intriguing conversation with my Dad and we happened upon a great idea.  

Essentially my theory (which is not backed up with data yet) is that a team won't cover the point spread for ever.  A team might under-perform a long time if everyone is quitting or they are disorganized (applies more to football).  Now a team in college basketball might win 30 in a row (Memphis 2007-2008) but I can be damn sure they didn't cover the spread thirty games in a row.  
Because the spread relates to expectations instead of skill, the spread will grow and grow (what kind of growth?  interesting question) until it surpasses even the best performance of a good team having its luckiest night.  The Patriots went 16-0 bit didn't go 16-0 against the spread.  

So essentially, a Martingale style system betting against a team to cover the spread could very well make consistent money long term because of the impossibility of a long, long losing streak.  A team might go 30-0 but they won't cover the spread nearly that many times.  And the advantage of the Martingale system is that it doesn't require you to win more than you lose, it merely requires that you win before you run out of money.

Now even ten iterations of the Martingale system (starting on a ten dollar bet ) exceeds $1,000.  That is a pretty steep climb.  But I would love to see what the chances are of a team pulling off a ten game spread-beating run. 

I tried the Martingale system in roulette when I was younger.  Obviously, my results were mixed.  

But the Martingale system applied in a human-expectation system will have a natural counter built in because its humans who make the spread and they will over-expect.  Turning the behavior of bettors against themselves.  

Likewise, with enough statistical data, one could wait for a three or four game covering streak to start betting against that team to cover as a means of decreasing instances bet and decreasing the preceding "tail" of a run.  

2 comments:

Ben said...

I'll preface this by saying that I have never bet on sports, and so bow to your expertise. However...

You say that the spread "relates to expectations." This is true. However it might be important to point out that these are the expectations of sports bettors, not necessarily sports experts. Bookies/booking services have an interest in setting provocative spreads that may or may not reflect reality in order to generate betting interest.

As good teams ride a winning/hot streak, don't the bookies have an interest in setting an increasingly impossible-to-beat spread in order to take advantage of all of the idiots who will always bet on the team that's winning?

Daniel said...

You're exactly right Ben! And thats the point: that teams that keep covering the spread (or exceeding expectations) will start getting ridiculously high spreads because people will keep betting on them to cover the spread.