Social scientists have long established the irrationality of the human being, contrary to classic philosophers’ opinions. This means that we don’t always make what seems to be the right decision because other factors come into play. Sports betting is one of those activities where people are irrational, diminishing our returns. Even experts are deciding to rely on automation to increase the objectivity – and scope – of their bets. Through it, they are completely removing irrationality in sports betting from the equation.
Irrationality in sports betting – a theoretical explanation
Operating individually in the market of sports betting is extremely hard because emotions prevent us from being completely rational. Indeed, social scientists have established the irrationality of the human being, disagreeing with most of what the classical thinkers thought.
We react to losses stronger than to gains, even if they are of the same magnitude. Through a simple test, Daniel Kahneman – a prominent behavioural economist – has managed to shed some light in this question.
Following the utility reasoning, it gets clear that we are taking into account more than just the money-value of the options presented. We are maximising our well-being but losing money in the long-run. That’s where the irrationality in sports betting comes from.
It goes as follows:
Imagine you are given a choice between making €1,000 with a 50% chance or being given €450. Others will be given a choice between losing €1,000 with a 50% chance or being forced to pay €450. The expected value of accepting the lottery is €500 and -€500, respectively.
Rational beings should prefer an expectation of winning €500 rather than winning only €450; as well as expecting to lose €450 instead of losing €500.
Instead, results showed that people tended to safeguard their €450 winnings and gamble their losses, expecting to lose €500. If you repeated these choices and decisions indefinitely, you would be worse-off an average of €50 every time… Madness, one should say! What is happening then?
It’s evolution, baby!
Well, when on a winning side, the danger of forfeiting it all and going back to square one hinders our decisions. When on the other side, the psychology is inverse: the possibility of shielding ourselves from any loss is preferred to suffering a certain drop in our wealth.
This led scientists to conclude that, for most people, the impact of having €1 more depends on the current state of things. Biologically, it is the result of evolutionary traits that focused on one’s self-preservation during uncertain times. Mathematically, it all comes down to the opposition between a curve and a straight line.
In order to explain the last idea, let’s now introduce the concept of utility. In economic terms, utility is the benefit one receives from a certain good or service and is measured in utils. It increases at a decreasing pace with the amount of good/service consumed (eg. the second slice of pie brings less satisfaction than the first one).
Well-being rather than money
The graph below represents the comparison between a completely rational reasoning (black) and ours (orange). Rationally, every €10 give you 1 util; for us, the utils given by €10 will depend on where we are on the curve. Assuming that having €0 gives us 0 utils, we have:
- Making €1,000 gives us 90 utils, while making €450 gives us 60u (since the first €’s are more valuable for us).
- With an equal chance of €1,000 or €0, our expected utility of the gamble is 45u (50% * 90u + 50% * 0u).
- Taking the certain €450 is worth 60 utils.
- As 60 > 45, we will decide upon the certain €450, even knowing that they are below the gamble’s expected value of €500.
- For the negative side, -45 > -60, so we’ll take the gamble instead of accepting an outright loss of €450 or, in other words, of 60 utils.
For a bit more depth on this, “Thinking, fast and slow” (KAHNEMAN, Daniel, 2011) is a must-read.
To sort this issue, we need to remove our own condition from the equation. That means relying on something, or someone, else to decide.
Even sports betting experts are increasingly relying entirely on automated decision processes to place their bets. Unbiased algorithms are being tasked with discovering value amongst the entire listing of available events.
The main effect of this change of paradigm is the increase in the volume of bets. Informed individuals are now able to run through extensive databases in an efficient way and find patterns invisible to the human eye. The markets where they can operate – and find their edge – are not limited anymore to the ones where they have already acquired significant knowledge and to their speed of analysis.
It is now profitable to apply strategies which edge is not as significant, but which behaviour is more predictable. It is possible to simultaneously operationalize both current and new strategies.
Imagine a traditional expert who is only able to select 400 events per year. If a given strategy brings an extremely small edge of 0.1%, his/her annual 400 €100 bets would return an extra €40 in a year. Probably not worth the hassle.
On the other hand, you have the algorithmic expert, who can select 10x more events per year and thus places 4,000 bets. The exact same strategy would bring him/her €400 per year.
Beware, due to higher volume, this method can also have significant losing streaks in really short periods of time. Make sure it fits your profile before following experts of this kind.
If it does, register now at Betmarkets to start following those experts!