What is asymmetric information?
Information asymmetry is an economic concept that occurs when at least one party in a transaction has relevant information others do not. Signalling through taking advantage of this asymmetry can transfer the information to the other party resolving the inefficiency.
Within a sports betting context, asymmetry occurs when a bettor possesses information the other actors in the market do not have available. This could range from insights within statistical models to early news on injuries or withdrawals. Signalling in sports betting involves the market adjusting to wagers placed by bettors in possession of such relevant information.
Using asymmetric information: Hopkins and Hamilton
Richard Hopkins spotted a young go-kart driver’s obvious talent when he was racing against his son. To Richard the young racer’s superior ability was obvious, so he decided to place a €200 wager on him to win a Grand Prix by the age of 23 at odds of 200. He also placed a €100 wager on the young driver to win the World Championship by the age of 25 at 500 and a further €50 on both events happening at odds of 1500. That young go-kart racer’s name? Lewis Hamilton.
Hopkin’s own specialised karting knowledge gave him an information advantage over the bookmaker. He turned this into a €165,000 win when Hamilton fulfilled that early promise.
Not all bettors are lucky enough to come across their own Lewis Hamilton, but the principle applies across all low information markets. Information is value and possessing better quality information than the rest of the market is likely to be profitable.
Finding a market
It is difficult to possess more information than the market on big events like a Premier League match. The value of any new information will quickly be factored into the market price. Picking a suitable event is therefore important for bettors who want to make long-term profits from information.
Some successful bettors specialise in niche leagues and sports with markets less reactive to new or better information. For example, by becoming an expert in an obscure soccer league you will likely be able to spot the omission of key players from line-ups before the odds move (if they move at all).
Another way to take advantage of specialised information occurs when a unique event takes place. Bookmakers and bettors alike can struggle to adapt to unprecedented events for which extensive data is unavailable.
Using an information advantage: New teams and The MLS
In soccer unprecedented events are rare. Teams often play each other multiple times over the course of a season. Player performance and results data are also freely available for analysis. However, even in such a well understood sport, informational advantages can provide opportunities for bettors.
The MLS occasionally provides such a unique event when a newly formed team joins the league. With no performance history or data to assess the quality of the new side they are often written off as outsiders.
For the 2016/17 season Atlanta United formed and joined the MLS. They were priced at 126.00 to win the MLS Cup. This ranked them as the worst side in the division alongside fellow newcomers Minnesota United. These odds were based upon the poor record of previous debuting teams in the league rather than the merits of Atlanta’s unique situation.
The bookmakers treated Minnesota and Atlanta as equals. Informed MLS followers knew that one side presented a much greater threat to the established order than the other.
Minnesota were similar to the classic MLS newcomer side formed of hasty signings and players from the lower US divisions bookmakers expected Atlanta to be. Atlanta were different in that instead of relying on a scratch squad they assembled one of the most valuable squads in the league.
They also hired former Barcelona manager Gerardo “Tata” Martino to coach the expensively assembled squad. Within weeks their odds had fallen to 16.00 despite the team’s performance merely matching fan expectations. By the time the 2017 MLS playoffs started Atlanta were fifth favourites for the title at 10.00 whilst Minnesota had already been eliminated early in the season.
The bookmakers treated Minnesota and Atlanta as equals. Informed MLS followers knew that one side presented a much greater threat to the established order than the other. Signalling of this information occurred slowly due to the markets low liquidity, leaving a valuable opportunity for bettors who had researched the newly formed side.
Acquiring relevant information
The internet has made valuable information much more accessible to bettors. Finding a profitable edge can be as simple as reading fan blogs from low liquidity leagues, keeping up to date with news from obscure sports prior to big events or making use of statistics that may not yet be factored into the market price.
Sports for which odds are only intermittently offered can provide opportunities as lines can initially be set far from true value. This can be the case before big events for niche sports, such as the Winter Olympics, for which bookmakers provide odds for sports that they may not usually price markets for.
Knowing the latest news on the health of Switzerland’s mixed doubles curling pair or the quality of the Nigerian bobsleigh team’s latest practice run could provide bettors with an edge not factored into the initial odds. With NHL players not travelling to the 2018 games, even a market with the liquidity level of ice hockey will have a greater level of uncertainty than usual.
Asymmetric information and the favourite–longshot bias
In their journal article Insider trading, herding behaviour and market plungers in the British horse-race betting market, Law and Peel (2002) found that the cost of dealing with those with insider information is passed on to outsiders through higher “bid-ask spreads” (the bookmaker’s margin in a sports betting context).
This causes the higher cost of dealing with bettors in possession of asymmetric information to be passed on to other bettors within the market through a higher bookmaker margin. This disadvantaged group often contains more recreational bettors who overbet longshots and underbet favourites, contributing to the favourite-longshot bias that exists within sports betting.
Measuring success: Beating the closing line
The viability of using information can be shown by how often a bettor can beat the closing line and make a long-run profit. The signalling of asymmetric information provided by such bettors will cause the line to move towards fair value, clearly demonstrating the relevance of the superior information held by the bettor. This can also provide arbitrage betting opportunities which, if used correctly, can reduce the variance of an information-based strategy.
Determining the value of your information in a low liquidity market can be more difficult. Fewer parties wagering on the market prevent the odds from drifting toward true value. Odds can also potentially become distorted by a single party acting on irrelevant or false information.
Limitations: Choosing the right bookmaker
Many bookmakers will implement low limits on markets with limited information and others will actively ban or limit customers who are profitable in niche markets. With such barriers in place it is important to find a bookmaker that will not limit or ban profitable bettors.
Pinnacle welcome winning bettors and use the signalling provided by their information advantage to shape our lines. If you are looking to make a profit from asymmetric information then make sure to choose a bookmaker that will reward you for valuable information in the long-run.