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Alternative asset classes: a comparison between finance and sports betting

written by Mercurius

4 things that sports betting and financial markets have in common

If you're looking for an alternative asset class, possibly highly uncorrelated to the market swings, you should go beyond classic alternative assets. It could sound odd, but you should consider sports betting as an alternative to stocks investment. Is there any difference between an investor and a bettor?

Well, when you decide to buy stocks and to invest in some companies, you are betting on them to succeed. Is it so different than betting on a specific team to win? Not really, indeed financial stock markets and sports betting share a lot of similarities.

  1. Investing is taking risks

    First of all, you can see that in both you are taking risks: in the first case, you have to decide in which company to invest, whereas in the second one you choose the team to bet. In both situations, your choice is risky, since you do not know the outcome: you will get a reward as your choice turns out to be correct or lose money otherwise.

  2. Information is the key

    Another important (and maybe the most important) element they both have in common is that information is crucial: the better-informed person will raise his chances to gain more profits. In finance, this aspect is clear to everybody: to this end indeed there are lots of consultancy companies (like hedge funds or asset managers) aiming at studying the market and providing investors with hints for the most profitable investments. In sports betting, this aspect might seem more abstract, but actually, it is not. Data in this field are becoming more and more detailed (Here is an article about it), and once you can exploit them in the right way, you will get an advantage against traditional bettors. It seems that the impact data have in sports might be even more meaningful than in finance. Probably this is due to the fact that data collection in the sports market is more transparent, and it is easier to understand rather than in finance, as also David Rothschild (Microsoft economist) pointed out: "While publicly available sports statistics are very deep, in financial markets there is more hidden, idiosyncratic information that investors have to gather."

  3. Taking informed decisions Vs. gambling

    Moreover, while there are different theories regarding the efficiency of the financial market, there is no doubt that the betting market is getting more efficient thanks to the increasing use of of big data and quantitative analysis. As a result, for the single trader (or gambler), making profits is harder than in the past. However, in both cases, we should not think that all the market participants rely on sophisticated strategies. Indeed many researchers have shown that the majority of bettors are not rational; they are instead victims of "psychological biases": they end up merely betting on their favorite team, for example. This naive attitude towards betting and financial investments is too risky to ensure reasonable profits.

  4. It's all about "bid & ask" price

    Anyway, in usual sports betting the gambling's dynamic is partially different from the financial one. It is true that in both cases, you decide to buy a stock and gamble based on your knowledge, but prices/odds formation is different. In finance, you can buy stocks since your buying offer gets matched with another investor's selling offer, and this mechanism is what generates prices. Economically speaking, trades occur because demand meets supply at that specific trading price. On the other side, when people bet, they usually bet against a bookmaker, like Paddy Power or William Hill, who sets the odds. Although the mechanism by which stocks' prices generates is more popular than the one applied to odds, this difference is minimal. Both markets, indeed, behave like "zero-sum game": if you win, your counterpart (either a bookmaker or another investor) loses and vice versa. At this point, An exciting development in the betting markets is worth to be mentioned: betting exchanges, like the one provided by Betfair. These new platforms allow traders to bet one against another resembling more a financial market.

Which sector is more profitable?

Given the similarities between these two worlds, a legitimate question could be: which one is more profitable? The answer is not easy since research in this field is still at its beginning, but one scientific paper, made by Long Rock Capital, shows that systematic investments in betting strategies can outperform both hedge fund managers and the S&P 500. For sure, this result needs further investigation, but it highlights again that sports betting is comparable to financial investments.

Conclusion

At this point, are you still sure that investing is so different than betting? Probably not, but now you are wondering: how you can I turn a profit from betting? In other words, how can I place my bets as financial analysts would suggest? As we have seen in this article, the financial market and the betting market are profoundly similar, so it is possible to apply the same quantitative principles to both of them. If you would like to go deeper into this link between the two, these articles will provide you some insights: Value Betting, The Importance of Diversification, Prediction Markets. While answering the above questions the services offered by Mercurius find their way: by exploiting Wyscout’s high-quality data and accurate algorithms; we enrich our customers providing them fully automated strategies so they can profit from the betting market too.

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