Throughout lockdown, both gambling websites and stock broker signups saw a surge in demand. With both our money and time freed up, many people looked to new ways of spending their time and money. Each day it seemed like a new Australian bookmaker or broker would pop up offering their services.
The issue with a surge of amateurs turning to a new hobby at once is that it leads to a lot of mistakes at once. The ramifications of this in the stock market were clear – it was acting more absurdly than usual.
Why nobody beats the market
Even though 85% of active funds underperform the market average, people continue to try and pick stocks out in an attempt to gain an advantage. When even the professionals are failing, it’s surprising to see how many regular people also attempt it. But why is it so hard, and how does this relate to sports betting?
Wisdom of the crowd can help us unpack why on paper it’s impossible to beat the market or be successful at gambling. Now, there may be some winners empirically, but we will dive into why there are outliers later on.
The anecdote to summarize the theory goes: in 1906, a crowd in a county fair was asked individually to guess the weight of an Ox. When adding up all 800 guesses made and calculating the average, it was within 1lb of its true weight (1,198lb). The collective guess was not only incredibly accurate, but it was more accurate than any one individual guess. Therefore, not one of the 800 people could beat the average guess.
This theory extends to all matters in life, and the stock market and betting markets are two of them. The more participants, the better the wisdom – and in stocks and gambling markets, there are a lot of participants. The stock price that we see on the screen factors in all future expectations – for example, our anticipation over a recession and the company’s imminent financial announcements. And, Wisdom of the Crowd suggests that the consensus guess – which is how the prices look right now – is ‘correct’ and more accurate than our own valuation.
Betting is the same to some extent when odds reflect the supply and demand for a bet on an exchange.
How do you explain successful outliers?
Many will point out that there are Warren Buffets of the world that show continual success over the long run. After all, anyone can get lucky in one roll of the dice, but the more rolls we make the truer our strategy’s effectiveness is revealed.
There are a few ways to explain this, but one is that markets are not perfectly efficient. That means, not all information is perfect and not all trades are immediate. For example, Warren may have more information than us, or may perform the trade faster than the average person does – therefore exploiting the small price discrepancy in a short period of time. Or, he could quite literally be one of the few that does have better guesses than the Crowd’s own Wisdom.
For betting, it may be that we can see the odds resulting from the Wisdom of the Crowd on many platforms, but one has a discrepancy. In this sense, the market has shown where the value is without any betting strategy whatsoever. Or, perhaps it’s the same as the above in which bettors get there before many bets are made. In any case, it’s safe to say that there isn’t safety in numbers – there are mostly losers. In the anecdote of 1906, all were losers. But, something quite special happens when we are brought together.
