Market Efficiency and Profitable Wagering in the National Hockey League: Can Bettors Score on Longshots?

• Author: Woodland, Linda M.

Linda M. Woodland [*]

Bill M. Woodland [+]

Sports betting and racetrack markets continue to provide researchers with opportunities to test the efficient market hypothesis. This paper investigates the efficiency of a relatively new sports betting market, the National Hockey League, for 1990-1996. The market is found to be somewhat inefficient and simple wagering strategies are identified that result in profitable returns. Consistent with previous research for football and baseball, bettors in hockey are inclined to overbet favorites relative to their observed chance of winning. Interestingly, the market does not appear to be converging to efficiency.

1. Introduction

   Considerable research in economics and finance has been devoted to the investigation of the efficient markets hypothesis. The fundamental question is whether prices fully reflect available information. If not, then in financial markets, it would be possible for an investor to devise a strategy that would earn above-average returns. Several authors have turned to racetrack and sports betting markets to address these issues. These markets are appealing in that they are simplified versions of the more traditional financial markets. They have a large number of bettors (investors), and extensive information sets are publicly available. Thaler and Ziemba (1988) maintain that betting markets are actually superior to the stock market in tests of market efficiency because each wager has a specific termination point: Wagers are settled when the race or game is completed. In contrast, stocks are infinitely lived.

   Generally, researchers investigate two different degrees of inefficiency. If the market is perfectly efficient, then all betting strategies should yield an expected loss equal to the commission for that market. If not, then the existence of profitable wagering strategies is examined. Of the four major professional sports, only the National Hockey League (NHL) remains unexplored. This paper addresses the question of market efficiency in this new market.

   Although the racetrack market has received the majority of attention, professional sports betting markets have been gaining ground in recent years. For an extensive review of the racetrack literature, see Sauer (1998). We believe that more consideration should be given to sports betting markets, as they more closely resemble financial markets. For example, racetrack markets appear to draw a higher percentage of recreational gamblers, who view gambling as a consumption good rather than a strategy to maximize their expected wealth. Commissions of near 20% make long-term profitable gambling extremely difficult. In sports betting, the relatively modest commissions or "vigorish" of 2-7% are likely to attract a significant number of individuals who consider their handicapping abilities sufficiently reliable to eventuate in profitable wagering. In many cases, these sports bettors have been fans of the sport for years and believe they have some special expertise in handicapping a matchup.

   Previous studies of professional sports-betting markets have included Zuber, Gandar, and Bowers (1985), Gandar, et al. (1988), Dare and MacDonald (1996), and Gray and Gray (1997), which focused attention on the National Football League (NFL). Camerer (1989) and Brown and Sauer (1993) have investigated the National Basketball Association while Woodland and Woodland (1994) studied Major League Baseball. Overall, both sports and racetrack betting markets have been found to be efficient. Although there are some deviations from the strict definition of perfect efficiency, there is little evidence to suggest the existence of long-term, profitable wagering strategies.

   A major finding in the racetrack literature is the presence of a bias that is consistently observed, regardless of the racetrack or time period studied. The tendency of bettors to overbet longshots and underbet favorites relative to their chances of winning has been referred to as the "favorite-longshot bias." While rarely sufficient in magnitude to allow for profitable betting opportunities, much attention has been paid to explaining this longstanding behavior of racetrack bettors. Interestingly, the reverse bias has been shown for baseball bettors. Both of these markets employ an odds system of wagering as opposed to the spread system common in football and basketball. As the hockey betting market also utilizes an odds system of betting, it provides an excellent opportunity to further investigate this apparent behavioral inconsistency between baseball and racetrack gamblers. Results obtained in this paper for hockey may help answer the question "Is the favorite-longshot bias confined to the racetrack?"

   The paper is organized as follows. Section 2 describes the structure of the NHL betting market. The data are discussed in section 3. Section 4 conducts several tests of market efficiency. Bettors' perceptions of home-ice advantage are also examined. Profitable wagering strategies are explored in section 5. Section 6 investigates the favorite-longshot bias in the NHL and compares the results to those of other betting markets. Concluding remarks are contained in section 7.

2. The NHL Betting Market

   Hockey is the last of the four major professional sports to become a fully established betting market, that is, the full slate of games is offered by most sports books. Only a handful of Las Vegas sports books offered hockey in the early 1980s. With an increase in the public's general interest in the league, coupled with an intensification of competition among both established and new sports books, hockey became a standard offering in the 1990s.

   The dominant betting structure in hockey is based on the familiar "money" or odds line that is prevalent in baseball and boxing betting. An example of a "standard" money line quote for hockey is given by

   Detroit Red Wings -1/2 -150

   Colorado Avalanche +1/2 +120.

   The last column represents the money line. A Red Wing bettor must lay $1.50 to win $1.00 while Avalanche backers wager $1.00 to win $1.20. We will label $1.50 as the favorite price and $1.20 as the underdog price. The differential reflects the commission paid to the sports book. For a detailed discussion of the money line, see Woodland and Woodland (1994, pp. 271-2). The 30[cts.] difference indicates that this line quote is taken from the 30[cts.] money line. The numbers in the second column represent half goals. Sports books post these numbers in a format that is comparable to spread bets. For example, a football team listed at (-7) must win by more than seven points to win the bet. For the previous hockey line, Detroit must win by more than half a goal, that is, win the game outright, in order for Detroit bettors to win. Conversely, Colorado bettors would win if the game ends in a tie. Because tie games are commonplace in hockey, this eliminates the possibility of a tie bet or "push," thus avoiding the book 's return of all wagers. The absence of ties in baseball makes this addition of the money line unnecessary.

   Hockey also differs from baseball in that lines are offered where both the underdog and the favorite bettors must wager more than their potential winnings. This arises when teams are more evenly matched. For example, for the 30[cts.] line,

   Detroit Red Wings -1/2 -120

   Colorado Avalanche +1/2 -110.

   These lines will be referred to as "double-negative" lines. In this case, the Avalanche is the underdog team, because the required wager to win a dollar is smaller compared to the Red Wings bettors. The favorite price is $1.20 and the underdog price is $1.10.

   Occasionally, sports books will put up a hybrid line of odds and spread, such as,

   Detroit Red Wings -21/2 -140

   Colorado Avalanche +21/2 +110.

   The Red...