Prediction Markets — One Giant Leap for Bettors

When Neil Armstrong stepped on the moon over fifty years ago, he took a small step for man and a giant leap for both mankind and bettors everywhere as this was the first time a bookmaker accepted a bet on a non-sports related event. As Todd Dewey explains in his Las Vegas Review-Journal article, Bookmaker William Hill lost bets when US landed on moon in 1969, when Neil Armstrong set foot on the moon, “the historic achievement won one small bet for a man from England and was one giant loss for British bookmaker William Hill.”

“Inspired by President John F. Kennedy’s 1962 ‘We choose to go to the moon’ speech, David Threlfall of Lancashire, England, asked William Hill in 1964 for odds on a man landing on the moon by the end of the decade,” explains Dewey. The sportsbook offered 1,000–1 odds on the bet, and Threlfall snapped it up, placing 10 pounds (around $170 today) on the wager, adds Dewey. “After Apollo 11 landed on the moon, and Armstrong uttered the famous phrase ‘The Eagle has landed,’ a William Hill representative handed Threlfall a check on live TV for 10,010 pounds.

William Hill wasn’t stupid as they had recognized the bet was a great way to market their brand. Today, William Hill’s non-sports offerings have probably multiplied by a hundred-fold, if not considerably more. According to Dewey, “William Hill UK currently offers 50–1 odds that man walks on Mars before the end of 2030.” Many would call these sucker bets, but now and then, a sucker bet lands (a few years ago, many Leicester fans cashed their 5,000–1 Leicester to win the Premier League tickets), and it is bets like these that keep the gambling world turning.

How Prediction Markets Work

Prediction markets work in the same way that William Hill did when it offered Threlfall the moon landing bet in 1964. Even today, William Hill provides bespoke betting, at least within reason. In 2013, as the BBC reports, a grandfather, Peter Edwards, netted £125,000 after he placed a £50 bet on his grandson playing football for Wales when the child was only 18 months old. Sixteen-year-old Harry Wilson made his international debut as a substitute against Belgium in October 2013, becoming Wales’ youngest-ever senior player, and his grandfather, who was quoted odds of 2,500/1 by William Hill 14 years before that call-up, struck it rich. Of course, this bet was another moonshot taken by the same bookmaker, but it reveals how prediction markets work, one person has an idea on a bet, gets the odds from a sportsbook then decides whether to take those odds or not. In this case, Mr. Edwards may have been making the bet on a lark, but this is a known market, and the bookmaker Ladbrokes has many similar progeny offerings.

To put it more succinctly, “prediction markets are ‘exchange-traded markets,’ of which many iterations exist within the conventional stock market. An exchange-traded market is a decentralized forum where participants buy, sell, and trade shares with one another,” says sportsbettingdime.com. “Unlike the stock market, prediction markets only trade in the outcomes of events, usually related to politics or economics, and prices reflect a designated probability of a particular event,” adds sportsbettingdime.com.

A prediction market share or binary option always trades between 0 and 100. Kind of like with a zero-sum game, prediction market bets always expire at full value (100) or completely worthless. They fluctuate depending on the likelihood of the bet succeeding during their life, and they can be bought or sold if the market is liquid enough.

Prediction markets allow an individual to be either the sportsbook offering the bet or the gambler who places the bet. Prediction markets differ from traditional gambling because a bettor/buyer isn’t handing cash over to a bookmaker who offers fixed odds to take the bet. Instead, he exchanges money with participants in a market he wants to buy into, says sportsbettingdime.com. Just like in the stock market, a prediction market buyer exchanges money for a financial instrument with other market participants at the price he chooses to engage the market, says sportsbettingdime.com.

A sportsbook “isn’t a free market, as the bookmaker is the one who sets the odds and subsequently determines the implied probability of that event taking place,” argues sportsbettingdime.com. In David Threlfall’s case, the odds on his bet were utterly out-of-sync with the market because William Hill recognized the enormous branding opportunity inherent in the wager. “Only months before his bet, a NASA-commissioned risk assessment had forecast the chance of a moon landing by 1970 at 1-in-20,” notes Dewey. Whether Threlfall had read the NASA-commissioned study or not, he thought the bet was a good one, and that’s the trick to winning against a sportsbook (or in a prediction market) over the long term — find an inefficient market that is priced incorrectly, then hammer it.

Pricing Inefficiency is the Road to Profit

Finding inefficient and incorrectly priced markets is not easy. But they are out there. Few people will outwit the betting crowd at Hong Kong’s Sha Tin or Happy Valley. Even with some of the most sophisticated analytics programs available, bettors will find themselves up against a whole host of other punters. Some well-funded syndicates use even more powerful analytical software to crunch even more metrics and variables (some from sensor-equipped horses), making their models even harder to beat.

While Threlfall was lucky enough to get extremely generous odds, Mr. Edwards wasn’t. He might have won a tidy sum, but the odds of an 18-month-old baby making their national football team should be far, far higher than the 2,500–1 he got. An efficient market would probably have priced that bet at closer to 250,000–1. Not many kids can navigate their way through the ranks of football academies, get signed up by a premier league team, and make it onto the pitch playing for Wales.

Pinnacle is one of the biggest sportsbooks in the business and renowned for accepting all bettors, no matter how good they are, whereas many sportsbooks like to shut down players who consistently beat them. Pinnacle, therefore, has highly efficient markets. In its article What distinguishes winning from losing bettors?Pinnacle claims, “One way to distinguish winning from losing players is to look at the odds a player received when they made their bet and compare it with the Pinnacle closing line. Consistently beating the closing odds at Pinnacle can be a strong indicator of long-term betting profits.”

“When a bookmaker opens a market for an upcoming game, the opening odds are calculated based on a statistical analysis of the team’s past performances, factoring in any other relevant piece of information such as injuries,” says Pinnacle. Once the odds are made public, the action comes in, the bettor taking the markets they consider good value. This drives the sportsbook to adjust the odds accordingly to avoid exposure and attempt to reach some form of parity, says Pinnacle.

“The odds offered just before a game begins are called the closing line and reflect all statistics, news, wagering activities, and market sentiment. The closing line should be the most efficient point of the market, and therefore the most accurate representation of underlying probability,” states Pinnacle.

Recognizing he had a good thing, Mr. Edwards tried to double-up his bet with William Hill after Harry enrolled in the Liverpool FC academy, says the BBC. “Harry was about 12 then. But they turned me down and said I already had a substantial bet with them. But they threw in England as a gesture of goodwill,” he added. Mr. Edwards was being a smart punter and trying to hammer the odds. Had this been a prediction market bet, he would have had no problem getting more of the action. But it wasn’t, and someone else had control of the bet and the power to shut down the offerings.

According to the BBC, Mr. Edwards said of Wilson’s first Wales appearance, “I was shattered because I had to wait for 85, 86 minutes before he came on and I was panicking because they’d already substituted twice, so I thought he wasn’t going to make it. But when he came on, I had another glass of wine. (I was) a proud granddad first for sure.”

While Mr. Edwards — and Harry Wilson — have great stories to tell their grandkids, Threlfall didn’t fare so well. With his winnings, he bought a holiday in the Bahamas and a brand-new Jaguar sports car. Sadly, he died in a car accident a year after his winning bet. Perhaps a reminder from the gambling gods that shooting for the moon can have downsides too? These stories illustrate that opportunities are all around us. There are inefficient markets everywhere; you just have to keep an eye out for them and find — or even create — a marketplace for them.

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