Whether they’re built on football or futures, markets tend to behave suspiciously like crowds at a busy pub. They’re noisy, sometimes wise, but are ultimately convinced they know more than they actually do. And for those wondering if the stock market is efficient and correctly priced (does a 10/1 bet really have a 10% chance of happening), it’s worth looking at other markets to see just how wise the crowd is (or isn’t).
Market mechanics
Both the stock market and the betting market are giant opinion machines where prices/odds reflect the weighted beliefs of the investing public. Hearing about the sacking of Sam Altman isn’t all that different from hearing about the sacking of Jose Mourinho. Within seconds, people make a bet and markets react.
The efficient market idea is that prices reflect all available information. It suggests that Nvidia’s price can’t be “wrong”, so to speak, because it reflects all information available. Likewise, England can’t be underpriced to win the World Cup. But we know that the truth is somewhere in between, a semi-efficient market, where some value can be found.
One difference is that those betting early on England to win the World Cup may be biased England fans, then the price may lengthen over time. This is an inefficiency correcting itself. And while we see a bit of this in popular stocks like Tesla, which have a fandom, stock markets care more about just the bottom line.
Identifying value
In both markets, value is everything. Finding mispriced odds/stocks is at the essence of strategy, whether it’s a fool’s errand or not.
The human mind specialises in sabotaging this effort. Traders lunge after “the next Tesla” the same way football fans pile onto a favourite team after gaining a bit of momentum. Recency bias, overconfidence, herding all infest Bloomberg terminals and bookmaker apps. The difference here is that sports bettors vocalise their biases more while traders disguise theirs behind acronyms and suspect world-views.
The conversation is also dominated by the price itself (constant talks of an AI stock bubble and P/E ratios), while hardly any of the conversation in pubs is about how good/bad the odds are. It wouldn’t hurt if both could take a step towards each other in the middle ground.
How political betting markets explain the differences?
Political betting markets sit awkwardly between the two worlds and may help highlight their true differences. They’re like sports markets in that you’re betting on an outcome on what’s essentially a bookies webiste, but they’re like stock markets in that the underlying events involve institutions, politics, the economy… You would expect political markets to look quite efficient, especially compared to sports betting markets, but actually, their odds often lag behind polling data and seem way off at times. They couldn’t have been further from predicting the success of Trump or Brexit.
That’s partly because the liquidity is low (a handful of big bettors can distort prices), but it’s also to do with time. Many of these political bets are months into the future, and so because people treat it as betting (not investing), only the long-odds bets are worth waiting for, or they’re just backing their team. With season-long bets in football, we see similar hiccups, but not so much in stocks.
Sports and political markets are charmingly human and still allow nonsense to thrive, while algorithms are behind many of the stock market transactions. And for anyone who thinks the wisdom of the crowd exists, political markets ask us to look more closely at who the participants are.
