10,000 people can’t be wrong. This might sound more like an advertising slogan than betting strategy but it’s more of a truism than you’d expect. Key to this is stripping betting down to the act of backing an opinion with money; what is important is how we interpret the aggregate opinion, when a crowd is wise and when it is just a herd. In this article we'll explore what wisdom of the crowd is, and how it applies to betting.
It’s the median of opinions that we’re interested in. But before we learn about wisdom of the crowd in betting, let’s understand what it means and how it’s defined. There are two seminal works on wisdom of the crowd. Francis Galton, a Victorian era polymath, submitted an article to Nature, an academic journal, in 1907 describing an event he attended at a county fair. He recorded the answers in a “guess the weight” competition of a slaughtered ox. From nearly 800 guesses, he found the median guess to be accurate within 0.8% of the correct weight. Though each individual had their own presumptions and abilities, the average of all the guesses turned out to be surprisingly accurate.
The second work, and much more recent, is that of James Surowiecki. In his book, The Wisdom of Crowds, he goes further to say that there are all manner of decisions that can be made by a group of people that satisfy the prerequisites for “Crowd Wisdom”. He states the four factors needed for an accurate prediction by the crowd are: diversity, independence, decentralisation and aggregation. In other words, a large enough sample of different people who have come to their own conclusion will likely yield an accurate result if the average of their predictions is taken.
Where these criteria are not all met wisdom can turn to herd mentality and the accuracy of the aggregate is negatively impacted. Returning to Galton’s Ox Fair, imagine the difference in guesses from a crowd of seasoned farmers as opposed to an audience seeing an ox for the first time. What if guesses were given in sequence, and therefore each guess was influenced by the previous, or some guesses were made by participants who didn’t bother to take a look at the ox but just relied on what they had heard third hand?
All these things are analogous to betting where bettors often make sub-optimal decisions and that isn’t even accounting for their own psychological biases – a whole series of articles soon to come.
Wisdom of the Crowd and betting
Consider the way that markets move for popular soccer events like El Clasico, the Manchester Derby and the Milan Derby. They’re all events that attract a diverse range of bettors. The first timer through to professional gamblers will all have an opinion and place their bets accordingly, but the latter is more important than the former and volume is more relevant than number of bets. One hundred 1mBTC bets on Real Madrid are less relevant than a big hitter with a positive lifetime P&L placing 10BTC on Barcelona in one hit. Even more so if the bet is made early.
More often than not, the outcome of a soccer game like this is reflected less accurately in the opening odds for a game which is when serious punters jump on incorrect odds. The public bet close to kick-off when a liquid market i.e with a lot of bets on all outcomes - reaches what is called efficiency. In fact at kick-off pros sometimes fade the ‘public’ team – the lazy choice – knowing that the flood of money is predictable and not informed.
And this isn’t just at play in soccer, it happens in most betting markets of a similar size. There’s a startling amount of prescience in these types of moves. They meet the criteria that James Surwiecki defined in his work on the wisdom of crowds.
Studies have shown that if participants are given the same knowledge, their collective judgement moves further away from an accurate median.
But of course it’s not always this easy to detect. If we think about betting as being relative to knowledge, a bettor may see the market move one way and decide that the crowd is correct, and the movement alone is enough evidence for them to follow suit – jump on the bandwagon. But you know what they say about bandwagons, if you can see one, you’ve already missed it. This kind of behaviour is known as an information cascade and in betting as chasing steam. It can be disastrous for unprepared bettors. Participants, all acting on the same centralised information, can skew the market. Read up on wooden roads in 19th century America for a good example of an information cascade.
Think of any time an outcome was a dead cert, or virtually guaranteed only to lose. This will happen fairly often in major horse racing events. The odds might shift on one horse by large margin before the race only for it to finish outside the podium. Bettors reacting to the market and feeling that the crowd might be onto something may be disappointed with their returns. Though just because a favourite loses doesn’t mean the odds were wrong. Sometimes favourites just lose.
Odds can also represent optimism, or more importantly, over-optimism, which brings us back to psychological biases.
The work of Daniel Kahnemann and Amos Tversky has taught us that when making decisions under uncertainty – such as betting – we make poor decisions due to a range of inbuilt biases, also known as heuristics. This relates to our evolutionary predisposition to be bad at making probabilistic decisions – what are the odds of that roar being a lion - but good at using simple rules of thumb – that sounded like the lion that tried attacking me last week, I should run.
Take an international soccer match between England and France for instance. The odds would undoubtedly favour England in English bookmakers and vice versa for France as the amount of blind support skews the market.
Finding value bets with the wisdom of the crowd
If, generally speaking, the right conditions mean the crowd is right, what use is it for betting strategy? Surely then, in today’s connected world, where information is so easily discovered it’ll be impossible to take advantage of this before the markets move. It depends on where you set the benchmark.
If we know that crowd wisdom needs diversity, independence and decentralisation to occur, we also know how to find value bets. We touched on it earlier in this article. It’s in markets where there’s no decentralisation or where information isn’t too diverse, or just very hard to find. Odds are a reflection of form and situational factors. But the bookies may not know the full picture for lower-ranked players or teams in the lower leagues.
Considering our example of soccer matches, lower down the leagues is where you’ll find an asymmetry of knowledge. In tennis, obscure events like Challengers will have a much narrower pool of bettors, inefficient odds and potential value if you can become a domain specialist. These markets won’t have the same diversity of bets. And through your own research, you’ll be able to spot the value.
Though following the wisdom of the crowd is great for simplistic judgements predicting the number of sweets in a jar at the school fete, it’s less reliable the more subjective the question such as in opinion polls ahead of Brexit or the 2016 US Election. In these situations individual knowledge can be a more powerful weapon in a bettor’s arsenal. The more knowledge you possess, especially within a niche market, the more likely you are to see success in the long run. Even if 10,000 people are proven wrong.