How The Wisdom Of Crowds Theory Applies To Betting

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The Wisdom of Crowds Theory suggests that the collective intelligence of a group is often superior to the intelligence of any individual member.

The betting exchange, such as Betfair, serves as a platform 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 consume new information, the odds adjust accordingly, reflecting all available information at any given time. These odds are dynamic and subject to change as new information emerges, such as news related to player injuries or team performance. On average, these odds are “fair” and accurately reflect the true probability of the outcome.

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.

 

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.

 

1. Diversity Of Opinion

Diversity of opinion is a critical factor in sports betting as it enables the creation of more accurate odds and predictions. The principle of Diversity of Opinion suggests that a group of people with different opinions and perspectives can collectively arrive at a better decision than any individual member of the group.

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 may rely on their gut instincts or knowledge of the teams and players. Some may follow trends and patterns in the odds, while others may consider external factors such as weather conditions or injuries.

By bringing together diverse opinions, the sports betting market can more accurately reflect the true probability of an outcome. For example, if a large number of bettors are backing a particular team to win, the odds will adjust to reflect this, making it less attractive to bet on that team. This, in turn, can lead to a shift in opinion, as some bettors may see value in betting on the opposing team.

In addition, diversity of opinion can also help bettors identify opportunities for arbitrage. If there is a significant difference in opinion between different sportsbooks, a bettor can place bets on both outcomes to lock in a profit, regardless of the final outcome.

Overall, diversity of opinion is a critical factor in sports betting, as it helps to create more accurate odds, identify opportunities for value and arbitrage, and ultimately, improve the overall profitability of the market.

 

2. Decentralisation

Decentralisation is a term used to describe the distribution of power and decision-making authority away from a central authority, such as a government or a corporation, to a larger group of individuals. In sports betting, decentralisation refers to the shift away from traditional bookmakers and toward peer-to-peer betting exchanges, such as Betfair.

One of the primary benefits of decentralisation in sports betting is that it eliminates the need for a central authority to set odds and handle transactions. Instead, bettors are free to place bets directly with each other, with the betting exchange serving as an intermediary to facilitate the transaction.

This shift toward decentralisation has several advantages for bettors. For one, it allows for more flexible betting options and greater control over the betting process. Bettors can set their own odds, choose which bets to accept, and negotiate with other bettors to find the best possible value.

Additionally, decentralisation can help to create a more efficient market, as the collective wisdom of the crowd can be used to determine the true probability of an outcome. By allowing bettors to set their own odds and determine their own betting strategies, decentralised betting exchanges can help to eliminate some of the inefficiencies and biases that are often present in traditional sportsbooks.

Overall, decentralisation represents a major shift in the sports betting industry, as it allows for greater flexibility, more efficient markets, and a greater focus on the collective wisdom of the crowd. While traditional bookmakers will likely continue to play a role in sports betting, decentralised exchanges offer an exciting alternative for those looking for greater control and transparency in their betting activities.

 

3. Independence

Independence is a critical and foundational concept in sports betting, as it ensures that the outcome of one event does not influence the outcome of another event, and that all decisions are based on objective information. By avoiding outside influences and making independent decisions, bettors can make more informed choices and improve their chances of success in the long run.

To understand the extent to which independence applies to sports betting, consider the example of a bettor placing a bet on a football match. If they base their decision solely on one team’s recent performance, this could be seen as a violation of independence because it fails to consider other relevant factors that could impact the outcome. Therefore, it’s essential for bettors to take a comprehensive approach to their analysis and consider all relevant information when making a decision.

Similarly, if a bettor is placing multiple bets on different matches, they should consider each bet independently and avoid allowing the outcome of one bet to influence their decisions in another bet. This is crucial for maintaining independence and avoiding poor decision-making, which could ultimately lead to losses.

However, in practice, some level of herding impacts the accuracy of odds. Herding occurs when individuals base their decisions on the actions of others, rather than on objective information. This can lead to an over-betting on popular outcomes due to biases in the market, resulting in less accurate odds.

 

4. Aggregation

Aggregation is a concept that is fundamental to sports betting as it relates to the idea of combining information from multiple sources in order to make more accurate predictions. In sports betting, this means combining the opinions of multiple bettors to create a more accurate representation of the true probability of an outcome.

One way in which aggregation is used in sports betting is through the use of betting exchanges?such as Betfair. These platforms allow bettors to bet against each other, with the exchange serving as an intermediary to match bets and facilitate transactions. By pooling the opinions and bets of many different individuals, betting exchanges can help to create a more accurate representation of the true probability of an outcome.

Another way in which aggregation is used in sports betting is through the use of predictive models and algorithms. These models are designed to analyse data from multiple sources, including past performance data, player statistics, and other relevant information, in order to make more accurate predictions about future outcomes. By combining the opinions and data from many different sources, these models can help to create a more accurate representation of the true probability of an outcome.

Overall, aggregation is a crucial concept in sports betting as it allows bettors to combine the opinions and data from many different sources in order to make more accurate predictions. Whether through the use of betting exchanges or predictive models, aggregation can help bettors to improve their chances of success and make more informed betting decisions.

 

Conclusion

The Wisdom of Crowds theory suggests that a large group of individuals, each with their own information and biases, can collectively make more accurate predictions than any individual expert. Is that really true in the case of sports betting?

Yes — the Wisdom of Crowds theory undoubtedly applies to sports betting.

Through betting exchanges like Betfair, diversity, independence, and aggregation of opinions among a large number of participants lead to a collective accuracy in the odds formed from diverse opinions. Despite some element of herding, on average, these opinions are accurate and representative of the chance of an outcome occurring. Therefore, the wisdom of crowds holds true for sports betting.

Originally posted 1st June 2016 and updated for 2023.

Toby @ Punter2Pro
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Ann M. Jordan
Ann M. Jordan
7 years ago

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.

Toby
Reply to  Ann M. Jordan
7 years ago

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”.

Tom Marshall
Tom Marshall
5 years ago

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