The Volokh Conspiracy - Globalization:

As lots of people have noted in the past decade or so, the increasing globalization of communcation and commerce has at times generated not only strong anti-globalization reactions in some quarters, but has actually stimulated nationalist feelings in many places. World Cup (my favorite subject these days) is an example -- seems to me that people care, if anything, more about their national teams in an age in which national borders, for other purposes, mean less and less. One consequence: there are now opportunities for arbitrage! I use an online betting service that operates out of the UK, and they have made England the favorite (even money) in the game against Portugal (11-4 underdogs). England the favorite?! The English, to any unbiased fan, have looked terrible -- anemic and uninspiring -- while the Portuguese have (notwithstanding that idiotic game against the Netherlands) looked terrific -- but the English fans, I think, are betting, in large numbers, with their hearts. I suspect if I spent more time at it, I could find similarly biased numbers at betting parlors in each of the countries whose teams are in the quarterfinals -- which means there could be some real money to be made here . . .

(link)

sammler (mail) (www):

Why do you think you could find those arbitrage opportunities, when the operators of betting parlors in both the UK and Portugal (which take far larger volumes than the online shops) are perfectly aware of the situation? Of course, they are crossing risk with each other, thus turning the national imbalance into risk-free profit.

6.29.2006 9:04am

Medis:

On the same vein as sammler:

As always in these arbitrage situations, the question is not whether there are dumb and/or foolish people participating in the market, creating opportunities for exploitation. Of course there are.

Rather, the question is why haven't the wise people in the market (the "smart money") already bid down these opportunities back to a fair price?

I see three notable possibilities:

(A) The smart money hasn't noticed the opportunity yet;

(B) The smart money has in fact bid the opportunity down to a fair price, despite how the situation appears to Mr. Post; or

(C) There are some barriers or costs associated with exploiting these opportunities for which we haven't yet accounted.

Personally, I'd be willing to bet on a combination of (B) and (C), and not (A). But I am admittedly an efficient markets type of guy.

6.29.2006 9:49am

Grant Gould (mail):

I'd bet on C -- in particular on reputational costs. The folks with enough money to make a dent in the odds mismatch generally have a high enough public profile that involvement with gambling would tarnish their reputations.

The few hundred dollars that you or I could sink into correcting this pricing error is simply not enough information in comparison to the huge amount of money sloshing around in their national markets; the people with enough money to actually clean up (on) the imbalance are not the sort of people who wish to be seen doing so.

6.29.2006 10:10am

Joshua (www):

I use an online betting service that operates out of the UK, and they have made England the favorite (even money) in the game against Portugal (11-4 underdogs).

Those odds don't seem right. If one side has roughly even-money odds, shouldn't the other side also have roughly even-money odds? (Or conversely, if one side's an 11-4 underdog, shouldn't that mean the other side is a 4-11 favorite?) I presume the house gets a cut of the action, but that cut would have to be exorbitant to account for such a big discrepancy.

6.29.2006 10:58am

Iain Murray (www):

Of course, there are other factors in play here besides form, such as the fact that Portugal have two players suspended, including playmaker Deco, and most of their other influential players, such as Figo, are carrying yellow cards, which means if they play too hard they could well miss the semifinal, which in turn means they have a fine line to walk. There's also the principle of regression to the mean - England's talented midfield has been underperforming, meaning it is likely that they will return to normal form soon ("Lampard is due a goal" is how the causal fan understands this principle). In this case, the wisdom of crowds may just be playing a part.

There is one other possible explanation, though: the England fans are drunk while betting. See here.

6.29.2006 11:33am

JDNYU:

Most people believe that bookmakers attempt to "balance" their action, by adjusting their prices so that they get the same amount of money on both sides of a game. Theoretically, the bookmaker's only financial interest in the bets it accepts is the vigorish it takes from losing wagers, and it simply wants to ensure that the amount of wagers on each side is equal. In reality, however, bookmakers attempt to maximize their bottom line. While having an exactly equal amount of money wagered on each contestant would guarantee themselves a profit and eliminate their risk, that won't necessarily maximize their bottom line. They can make more money when they accept bets at odds which are "inflated" from those which are likely to occur. So for example, if the majority of their customers are going to bet on a team regardless of the price, they will set the price as high as possible. This is called "shading" the line. Generally, the public prefers to back the favorite, and unsophisticated bettors often show up during large events such as the Final Four and the Super Bowl. Some bookmakers actually offer different prices to different customers, using past bets as an indicator of who the customer will bet on as a way of additionally increasing their potential profit.

From wikipedia

Sounds like a well-shaded line.

6.29.2006 11:46am

hey (mail):

Until Bill Gates or some hedge funds start trying to arb these markets, it will be nigh impossible to correct national biases on World Cup matches. Though they could probably make serious money doing it. Another problem is making enough bets, as it is unlikely that you can place one single bet that will change the market. So you have very high transaction costs.

6.29.2006 12:02pm

Grover_Cleveland:

These odds are for the result after ninety minutes of regulation time, which could be a tie.

6.29.2006 1:05pm

One rational reason for favoring England (despite their unimpressive performances) is that several Portugal players are suspended or injured after the violent Netherlands match.

6.29.2006 1:06pm

DonBoy (mail) (www):

The folks with enough money to make a dent in the odds mismatch generally have a high enough public profile that involvement with gambling would tarnish their reputations.

I don't think so. There are syndicates (in the sense of group ventures, not necessarily in the sense of "crime family") willing to move millions of dollars to make money doing this, particularly in Asia.

6.29.2006 4:42pm

jdnyu:

and see Mark Cuban's suggestion to start a sports betting hedge fund.

6.29.2006 6:02pm

Mr. Gould: Gambling in the UK lacks the social stigma found in the US. The large betting parlors (Ladbrokes, William Hill, Paddy Power) have roughly 100 branches each in London alone. They certainly have the money to flatten any arbitrage -- it is, after all, their business.

What you are seeing at the retail level is the imbalance which the bookmakers have determined is profit-maximizing. If they flattened it completely, partiotic betting money would be attracted (in both countries) by the resulting more-attractive rates, and they would have to send that money offshore for no profit. Conversely, if the price imbalance is so large as to allow them to run a flat book without sending risk offshore, they are foregoing profit. The imbalance you see is designed to cross patriotic fans in one country with their counterparts in the opposing country, at terms acceptable to both but also profitable to the bookrunners.

6.30.2006 7:59am