The Weird World Of Economics

Dissecting the Line

By STEPHEN J. DUBNER and STEVEN D. LEVITT
Published: February 5, 2006

If you are a bookie, legal or otherwise, today is a signal day. People who would never think of wagering on a regular National Football League game suddenly become desperate to bet the Super Bowl. People who do bet the N.F.L. every week (there are millions upon millions of them) can hardly stand by and watch the tourists have all the fun. This makes for a day in which billions of dollars change hands — as much on this single game as is bet on a full slate of games during an entire month of the regular season.

Which means that if a bookie loses big today, it could ruin his year. And, yes, bookies can lose. In a Las Vegas casino, games like roulette and blackjack match a player against the house in a contest whose odds are engineered in the house's favor. But in the casino's sports book, things are different. The house's bookmaker sets a price in the form of a point spread — the Denver Broncos to win by at least 7 points, for instance. A bettor is then free to take either side. He can bet the Broncos minus 7 points (he'll win this bet if the Broncos win the game by more than 7 points), or he can bet the Broncos' opponent plus 7 points (he'll win if the Broncos lose outright or win by fewer than 7 points; if the Broncos win by 7 exactly, it's a "push," or tie). For a bookie, offering these options creates risk. In financial markets, the primary role of the market maker is simply to match buyers with sellers; but in gambling, the market maker sets the price and sells the shares. To win, the bookie must consistently outsmart his customers.

As it happens, there is one betting strategy that will routinely beat a bookie, and you don't even have to be smart to use it. One of the most undervalued N.F.L. bets is the home underdog — a team favored to lose but playing in its home stadium. If you had bet $5,000 on the home underdog in every N.F.L. game over the past two decades, you would be up about $150,000 by now (a winning rate of roughly 53 percent). This fact has led some academics to conclude that bookmakers simply aren't very smart. If an academic researcher can find this loophole, shouldn't a professional bookie be able to?

But the fact is most bookies are doing just fine. So could it be that bookies have a good reason to allow that loophole to dangle? Could it be that a seemingly dumb bookie is actually dumb like a fox?

To find out, we visited Chuck Esposito, a genial, quick-witted and thoroughly sports-fixated man who runs the race and sports book at Caesars Palace in Las Vegas. Esposito, 43, is a rare breed: a legal bookmaker. The money bet on sports at Caesars and other Nevada casinos is meager compared with the wagers made through illegal bookies and quasi-legal Internet casinos. (Nevada, the only state that allows wide-scale sports betting, takes in perhaps 1 percent of the total United States sports-betting handle.) But with legality comes some measure of transparency, which makes the Caesars bookmaking operation worth studying. We saw Esposito on New Year's Day, the final Sunday of the 2005-6 regular N.F.L. season.

The lounge where bettors congregate at Caesars is vast and thriving; six jumbo TV screens tower above the betting counter. Tucked behind all this is Esposito's windowless office, decked with sports memorabilia from his native Chicago. He is monitoring today's games on his own TV sets, seven small and aging models. Without checking his computer, Esposito knows full well which teams need to win today for Caesars to make money. How do things look so far? "As you can see," he says, grinning, "I'm not under my desk, and I haven't had to use the defibrillator today."

The most certain way for a bookmaker to turn a profit is to balance his book — that is, to set a point spread that produces an equal number of dollars wagered on both sides of the line. Since only losers pay the house a 10 percent fee (known as the vigorish, or vig) on top of wagers, a balanced book guarantees the house a 5 percent gain. The conventional wisdom holds that bookmakers set point spreads to achieve this balance. "It's a myth when they say that every game is balanced," Esposito says. "If we could do that on every game, we would win every game, but it's impossible to do. The point spread is the equalizer, but you still can't talk the public into betting one side or the other."

The reason the public can't be talked into betting a particular side, at least not too often, is that the public has biases. For every bettor smart enough to stick to home underdogs, there are 5 or 10 bettors who systematically prefer favorites or who underestimate the impact of home-field advantage. (It isn't clear why bettors prefer favorites, but such a tendency characterizes most betting against a spread.) Then there are the bettors who disproportionately take the "over" in an over-under bet (in which a bettor wagers on the total number of points scored in a game), presumably because, when it's time to watch the game you've bet on, it's a lot more fun to root for points to be scored than for points to not be scored.

So does Esposito exploit those biases to increase his winnings? "But I don't know when the public's wrong, I really don't," he says. "That's a myth, too. I hear that all the time: 'You know who's going to win.' I wish I did."

In determining where to set the opening line, and when to adjust it, Esposito works hard to read public sentiment. One good clue is when a team's jersey starts to spike in popularity among Caesars customers. (This season it was the Cincinnati Bengals and the Chicago Bears.) He notes which teams, despite their success, fail to become "public" teams. (The Seattle Seahawks and the Carolina Panthers.) But the most valuable tool is what Esposito calls "booking to faces" — that is, monitoring the betting counter to note which bettors are placing which bets. "If someone comes in, his rich uncle died and left a gazillion dollars, and he wants to bet $100,000 on the line, we probably won't change the line," he says. "But if we get a $5,000 bet from a handicapper we know to be really smart, we may well move it."

By Esposito's estimate, about 20 percent of the money bet on football comes from sophisticated bettors — the "sharp guys" — with the remainder

coming from a group known industrywide as the squares. The trick is to set a line that will satisfy both constituencies and make the casino lots of money.

Unfortunately, Esposito couldn't open up his books to show us just how this plays out at Caesars. (Transparency has its limits.) But a different set of data, taken from a handicapping contest run by the online casino CaribSports.com, can address the same issue. In these data, 285 bettors made more than 20,000 wagers on N.F.L. games. What do these data show?

The 285 bettors exhibited the typical preferences mentioned above — a strong bias toward favorites and a weaker one toward visiting teams. The bookmaker, meanwhile, didn't merely acknowledge these biases and balance the book down the middle; it appears that the bookmaker strategically set point spreads to exploit these biases.

How does this work? Let's say that a bookmaker is handicapping a game between the Broncos and the Pittsburgh Steelers. He first studies every conceivable element of the game: strengths and weaknesses, momentum, injuries, tendencies, weather forecast, etc. He then decides that the true line — that is, a line that he figures will give each team a 50 percent chance of winning the bet — happens to be Denver minus 7 points. But because of bettor bias, perhaps as much as 80 percent of the money will inevitably flow to the favorite. So what if the bookie sets the line a little higher, at 9 points? Denver is still likely to draw the majority of the wagering, but its chances of winning the bet are now slightly less than 50 percent. The bookie has thus managed to tempt the majority of the wagering toward an outcome that is unlikely, even if only slightly, to happen. Over time, this pattern will yield the bookie a gross profit margin 20 to 30 percent higher than if he had simply balanced the wagering. In other words, why should a bookie play for the safe 10 percent vig when he can play it only slightly less safe and make much more money?

Chuck Esposito, though he is too smart to come out and say so, seems to be doing precisely the same thing at Caesars. What he will admit is that he doesn't mind if the wagering on a given game comes in at 80-20 instead of 50-50, as long as he thinks that Caesars is on the right side of the imbalance.

the super bowl, meanwhile, is an entirely different beast. A look at the past reveals this interesting anomaly: whereas only one-tenth of regular-season N.F.L. games have a final point spread in the double digits, fully one-third of the past Super Bowls (13 out of 39) had double-digit point spreads. This is especially surprising since the Super Bowl matches the best team from each conference, whereas regular games often pit a good team against a poor one.

What does this yawning gap mean? It suggests that faced with the risk of wiping out a season's profits, bookmakers play it safe on Super Bowl Sunday. Unlike a typical N.F.L. game, the Super Bowl gives a bookie incentive to balance his books and simply pocket the vig. To do so, he needs to inflate the spread against the favorite even more than usual, bringing in more underdog money and making the odds of the favorite's covering the bet even lower than usual.

A strategy of consistently betting the underdog has not done so well in past Super Bowls, paying off only 17 times in 39 years (the favorite covered the spread 19 times, and there were three pushes). But a small sample set should not get in the way of a larger truth: the economics of bookmaking suggest that betting the underdog today remains the single best bet of the year.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

posted by UncommonBusiness @ 6:03 AM