The Wisdom of Crowds Theory suggests that the collective intelligence of a group is often superior to the intelligence of any individual member.
Betting exchanges, such as Betfair and Matchbook, serve as platforms for aggregating the opinions of a crowd on uncertain sporting events. The collective opinions and actions of the betting public determine the odds of a given outcome. As the betting public consumes new information, the odds adjust accordingly, reflecting all available data at any given time. While these odds often represent a fair estimate of probability, they are not infallible. Market inefficiencies, insider information, and biases can sometimes lead to mispriced odds.
In this article, I will discuss how the emergence of betting exchanges has enabled sports betting to satisfy the four conditions of the Wisdom of Crowds theory while also addressing some of its limitations.
Article Contents
The Four Conditions of The Theory
According to the Wisdom of Crowds theory, for a crowd to be considered “wise,” four conditions should be met:
| CONDITION | EXPLANATION |
|---|---|
| 1. Diversity of opinion | Each person should have private information even if it’s just an eccentric interpretation of the known facts. |
| 2. Decentralisation | People are able to specialise and draw on local knowledge. |
| 3. Independence | People’s opinions aren’t determined by the opinions of those around them. |
| 4. Aggregation | Some mechanism exists for turning private judgments into a collective decision. |
For the rest of this article, I will examine how each of these four conditions applies to sports betting and where potential weaknesses exist.
1. Diversity of Opinion
Diversity of opinion is a key factor in sports betting as it enables the creation of more accurate odds. A group of people with different perspectives can collectively arrive at better predictions than an individual expert.
In sports betting, diversity of opinion comes from the various factors that influence a bettor’s decision-making process. Some bettors may focus on statistics, while others rely on instincts, team knowledge, or external factors like weather and injuries. This mix of perspectives helps the market form odds that generally reflect true probability.
However, not all markets are equally diverse. In smaller or niche sports, a lack of diverse opinions can lead to inefficiencies. Sharp bettors can exploit these inefficiencies in the form of value bets or arbs, while casual bettors may misprice odds due to biases or limited knowledge.
2. Decentralisation
Decentralisation in sports betting refers to the shift away from traditional bookmakers and towards peer-to-peer betting exchanges like Betfair. Instead of a central authority setting odds, bettors determine prices by placing bets against each other.
This structure offers advantages, including greater flexibility in setting odds, the ability to take on the role of a bookmaker, and a more dynamic betting experience. Bettors can adjust their positions based on new information, leading to an efficient market in many cases.
However, decentralisation doesn’t guarantee perfect efficiency. In low-liquidity markets, sharp bettors can have an outsized influence on pricing, and misinformation can spread, affecting odds. Additionally, market manipulation, such as placing large bets to shift odds artificially, can sometimes distort the wisdom of the crowd.
3. Independence
Independence is crucial for the Wisdom of Crowds theory to work. If bettors make decisions based solely on their own research, the market becomes more efficient. However, in reality, herding behavior often impacts sports betting markets.
For example, if a well-known tipster or expert picks a certain outcome, many bettors might follow that advice without conducting their own research. This can lead to over-betting on popular outcomes and distort market efficiency. Likewise, social media, betting forums, and tracking sites can amplify herd behavior, making odds less accurate than they would be in a truly independent market.
Although true independence is rare, experienced bettors who analyze data without external influence can sometimes find mispriced odds created by the general betting public’s biases.
4. Aggregation
Aggregation in sports betting refers to how individual opinions and bets combine to form market odds. Betting exchanges, predictive models, and algorithm-based pricing all contribute to this process.
In liquid markets, aggregation generally works well, producing accurate odds that reflect true probabilities. However, certain factors can disrupt this accuracy. Low-liquidity markets may see sharper bettors driving odds, while insider knowledge can sometimes create pricing inefficiencies. Additionally, manipulation tactics like placing large bets to mislead the market can interfere with true probability assessment.
Despite these challenges, aggregation remains a key strength of betting exchanges, as it enables market participants to react to new information quickly and adjust odds accordingly.
Conclusion
The Wisdom of Crowds theory suggests that a large group of individuals, each with their own insights, can collectively make more accurate predictions than any single expert. But does this always hold true in sports betting?
For the most part, yes. Betting exchanges enable diversity, decentralisation, and aggregation of opinions, which helps create efficient markets. However, the principle of independence is often compromised due to herding behavior and external influences. Additionally, inefficiencies can occur in low-liquidity markets, and insider knowledge can distort true probabilities.
While the Wisdom of Crowds largely applies to sports betting, it is not a perfect system. Sharp bettors, market biases, and external influences can create distortions. Understanding these limitations is essential for those looking to take advantage of market inefficiencies.
Originally posted 1st June 2016 and updated for 2023.
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As much as I find it hard to believe that we “get it right”, it sort of makes sense. The same theory applies to all sorts. You’d think there would be too many unfounded opinions for WoC to hold true on the betting exchange, though. Interesting.
Of course there are inaccurate prices on the exchange. Generally, if you bet randomly what you’d get is a mixed bag – where there’s both positive and negative value. As a result you break even, and the market was “right on average”.
Very very interesting you arrived at the conclusion that “WOC is the most important thing I have ever learned about sports betting”.
I am arriving at the same conclusion BEFORE I read the article.
But you need to continue with this article and tell the public which is the best betting style to tack advantage of this. After all that is the primary reason people are reading your blogs.
I am of the firm opinion that price movement is the manifestation of WOC and so I analysed 1 years worth of Aust horse price movements. Specifically I analysed what I thought were the KPIs of the movements and came up with a very healthy ROI. This was done early this year and I wrote software to monitor the prices and place bets automatically just before the race starts. Over 2 mth with 1000s of tiny bets it is ahead.
1. I need to get a data scientist involved to help me optimise the KPIs. This will take time.
2. Bets need to be made just before the off as dramatic profitable moves can happen just before the off. Not sure why but it works. DOWNSIDE need to physically watch the lead up to the off. Been thinking of employing someone.
If you wish to communicate with me directly I am happy to do so.
Thanks
Tom