Apr 9, 2020
Apr 9, 2020

# Applying Wisdom of the Crowd to sports betting

## Knowing when to trust Wisdom of the Crowd

If you are looking to establish a predicted outcome for a difficult conundrum, it is reasonable to assume that surveying a large number of people for their prediction will generate a relatively accurate collective guess. This theory is known as Wisdom of the Crowd and can be an effective way of making decisions when faced with uncertainty, such as on a sports betting prediction.

However, this method is only viable if you can establish when the crowd is reliable and when they are acting as a foolish herd, so how do you know when they are getting things wrong? Read on to find out.

### What is Wisdom of the Crowd?

Wisdom of the Crowd works by getting a large number and variety of people to predict an outcome for a certain scenario. The theory dictates that the participants will over and underestimate outcomes in approximately equal measure, leaving the average of their predictions as close to perfect.

While this method cannot guarantee that you will guess the exact number, in most cases your guess should be at least somewhat close to the actual outcome

This phenomenon was first observed in the early 20th century by the anthropologist Sir Francis Galton. While attending a livestock fair, he observed a competition to guess the weight of a butchered ox. Nobody correctly guessed the exact weight, but Galton calculated that the median of all the guesses submitted was within 0.8% of the answer.

As explored in James Surowiecki’s 2004 book The Wisdom of Crowds, the method transcends many aspects of decision making and can be applied to a wide and fascinating cross-section of scenarios. Among the most notable is the search for the USS Scorpion submarine, which was lost in the North Atlantic ocean in May 1968.

The navy’s search efforts were only able to locate the wreck within a 20-mile range. In a test of collective wisdom, naval officer Dr John Craven sought individual insights from a broad and varied group of naval and salvage experts, and utilised their collective information to pinpoint a location that turned out to be just 220 yards from the actual wreck of the Scorpion.

### Using Wisdom of the Crowd in sports betting

Similarly to locating a shipwreck, the results of sporting events cannot be known in advance, yet generally this doesn’t prohibit the ‘crowd’ from making a collective accurate assessment of the probabilities for specified outcomes. A bookmakers’ odds gain accuracy from Wisdom of the Crowd by shaping the opening line and exposing it to public appraisal.

The sharpest bettors tend to place their bets first, while the ‘public money’ often comes in later.

Particularly sharp bettors will have their own ideas about opening lines that will prompt them to place quick bets and re-shape the markets. This occurs frequently at Pinnacle because our customer base includes a high proportion of sharp and high precision bettors attracted by the lowest margins.

As the market becomes more ‘liquid’ (in other words, more people voice their prediction by placing a bet), it generally moves to its most efficient position. This is in the same manner as to how a crowd-informed guess should become more accurate as more guesses are placed.

However, in the case of locating the USS Scorpion, Craven restricted his ‘crowd’ to the best available experts and garnered independent opinions. When it comes to betting, sharp bettors are not the only participants and decisions aren’t made in a vacuum, so what happens when other less informed bettors weigh in, and cases when there are no sharp predictions whatsoever?

The bettors that contribute to the movement of a market are generally drawn from an expansive spectrum of knowledge and experience, and there is often a specific distribution to the times that different groups place their bets.

As covered in other articles, an important component of betting is understanding behavioural biases, and how they can impede rational risk assessment. As mentioned, the sharpest bettors tend to place their bets first, while the ‘public money’ (effectively, less informed betting) often comes in nearer to the start of the event.

Frequently, these bets rely on arbitrary factors to inform their decision, such as “Which team am I more familiar with?”, “Which team do I recall winning more often?” or “Which team is everyone else betting on?”

These lazier judgments normally result in more money being bet on the favourite, skewing the market away from its most efficient position.

This is an illustration of how Wisdom of the Crowd can be displaced by foolishness of the herd. Public money may distort rather than reverse a market, but this kind of collectively poor reasoning, known as an information cascade, can have far greater impact.

### The cases of Harry Redknapp and Germany

Examples of information cascades outside of betting include a run on the bank, or the rise and swift fall of wooden roads in the 19th century (also covered in Surowiecki’s book).

Information cascades result in feedback loops, as bets are made on the assertion that initially drove the price down.

In the betting world, the soccer managerial markets often follow the information cascade model, such as following Fabio Capello’s resignation as England manager in February 2012. This prompted swathes of bettors to wager huge amounts on narrow odds that Harry Redknapp would be hired as his replacement.

On this occasion, the market was driven to an inaccurate judgment based on persuasive arguments for Redknapp’s appointment and many bettors willingness to rely on the judgment of others and the media. Ultimately, Roy Hodgson was instead announced as the new England manager that May.

More recently, for the 2018 World Cup Germany were installed as the favourites or joint-favourites to win the tournament with a majority of bookmakers and were also one of the most popular choices for bettors.

The thinking behind this was relatively straightforward – Germany were the defending champions, second in the FIFA World Rankings and had consistently reached the latter stages of recent international tournaments.

However, upon closer inspection, Germany entered the tournament in relatively poor form, having won only one of their previous six matches with a friendly victory versus Saudi Arabia. Their group comprised of Mexico, Sweden and South Korea was also amongst the most difficult according to their respective Elo World Ratings.

On top of this, many of Germany’s key stars who played a large role in their 2014 success such as Phillip Lahm, Bastian Schweinsteiger and Miroslav Klose were not present in the 2018 squad, their places taken by nonetheless talented but crucially less experienced players.

While their group stage elimination can still be considered a shock, there were plenty of reasons to craft an argument suggesting that winning the tournament would prove a particularly difficult task for Joachim Low’s squad.

Information cascades often result in feedback loops, as decisions (or bets) are continually made based on the original assertion that initially drove the price down. This underlines the point from the case of the USS Scorpion – the more difficult the question and/or the weaker the knowledge pool, the less reliable the collective wisdom will be.

If bettors can avoid being swept away by the cascade, these situations can present significant opportunities and help inform a sports betting prediction.

### Knowing when to trust Wisdom of the Crowd

Motivation is a key factor in the forming and movement of markets. Speculators are motivated by profit but the ways in which this can be achieved are divergent.

The more ‘liquid’ a sports betting market, the better the collective wisdom.

In the financial world, ‘pump and dump’ commonly refers to the practice of hyping shares to inflate their price and enable short-term gains, while the inverse is also common with shortening of shares that are driven down in price by negative speculation. These tactics drive the market in an unnatural direction, and this can also occur within betting.

The speed with which information now disseminates (particularly via social media) can make this even more pertinent, and is not a circumstance where the crowd can be trusted.

Notwithstanding some of the biases outlined, the fact remains that for major sports such as big soccer leagues and US major league sports, the more ‘liquid’ a market, the better the collective wisdom. Naturally, this makes it much harder for bettors to find value.

However, with niche and less popular sports, the absence of prevalent information can in fact generate opportunities to enjoy better value. There will be fewer high precision bettors looking at niche markets, and it will also more palpably test the knowledge of the bookmaker.

This means that in less popular markets, bettors willing to do the necessary research can position themselves to enjoy greater value by recognising when the crowd is lacking wisdom and reacting accordingly.

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