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Wednesday, December 08, 2004

Mark Cuban is starting a sports gambling hedge fund

    Posted by Adam Crouch

Source: Indian Exporters DirectoryMark Cuban, co-founder of, owner of the Dallas Mavericks, reality TV show host, and blogger, has decided to start a new hedge fund.

The focus: Sports gambling

I know next to nothing about sports gambling, and I think it's fairly silly when people say, "Investing is just another form of gambling." You'll lose money in the long-run playing blackjack, while you'll make money in the long-run investing in an index fund.

That being said, sports betting does seem like a good opportunity for those with a lot of specialized knowledge. Many (if not most) people who bet on sports are betting on emotion, not on analysis. They're betting for their favorite team, not for the one that has the has the highest probability of winning given weather conditions, past performance in similar match-ups, etc.

I did try sports gambling once. Back in June, everyone and his brother was talking about horseracing. Why? Because a horse named Smarty Jones looked like he might win the Triple Crown -- the first such winner in 25 years. When it came time for the third and final race, the Belmont Stakes, I made the assessment that the "stock" in Smarty Jones was overvalued. I know absolutely zero about horses and horseracing, but I do know about people behave, particularly with their money. People were excited, and wanted to be able to say they bet on the horse that won the triple crown -- to have that betting stub to show their grandkids.

Apparently you can't really bet that a particular horse will lose, you can only bet on which one will win/place/show., well-known for their fascinating poltical betting/prediction markets, does allow you to "short" a particular horse, so I shorted Smarty Jones. I took no view on whether he would win or not, just that he was overvalued, so when the price of the "Smarty Jones to win" contract lost value in the minutes before the race started, I went ahead and took my gains and pulled out, rather than actually betting on the outcome of something I know nothing about. I made a little bit of money (but far more utility :)), though I do wish I'd stuck it out...

Anyway, Mark Cuban says:
Most casual gamblers, who are the majority of the money spent, go to vegas expecting to lose money. It's part of the entertainment experience. People put money in mutual funds and in their brokerage accounts and pick stocks expecting to make money. They don't find any value in losing money on a stock, fund or other traditional investment. That changes the opportunity completely.

How efficient can a market be when the majority of investor expect to lose money? The sportsbooks know this. They know the difference between smart and stupid money.
They set odds in order to attract as much emotional, stupid money as it possibly can.

He also raises a very good point about the quality and quantity of available sports information:

When you think about betting on sports, there really is far better information about your local sports team than there is about any local business in your market. The local papers cover the team every day. The local TV station gives a report about every game. There are radio stations who cover them for hours at a time. That’s far more information than you get about Tyco or Computer Associates or NFI.

In sports, when someone does something wrong, they pretty much tell you the next day or two. Someone suspended -- You know it. Someone hurt -- They report it, and do a better job of policing that than any industry watchgroup.

And stats? my goodness. There is no comparison. You can tape everything and create your own stats, which I'm sure every "smart money" gambler does. There are public play-by-plays of every game. There are websites that analyze every which way from sunday every action and inaction of every player in the game.

There also is no such thing as insider information either. Player and team reps can't talk to known gamblers, but do they really need to?

Reporters are there after every practice to interview the players and coaches. They ask the same questions that every gambler wants to know, if only so they know who to pick for their fantasy teams. They also get to see and report on who is there and who isn't and who is limping and who isn't.

Baseball lends itself so well to statistical analysis that there's even a name for it: Sabermetrics

So let's see: a market with a limited set of well-defined outcomes, with a wealth of excellent data available, and yet most participants go purely on emotion, fully expecting to lose money. Sounds like there are probably a lot of inefficiencies that can be exploited there. Mark Cuban didn't become a mult-billionaire being stupid.

Creating a hedge fund with the explicit purpose of gambling on sports is certainly unorthodox, but it wouldn't surprise me if it works out well. A team of full-time, experienced analysts should be able to find some good opportunities.

Related Reading
Sabernomics - Sabermetrics and Economics blog
Will bots destroy online poker? - Me at The Raw Prawn
Hedge fund created to target alleged Coke abuses - Michael at Mahalanobis

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