Does the Hot Hand Drive the Market? Evidence from College Football Betting Markets

Michael Sinkey () and Trevon Logan
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Michael Sinkey: Department of Economics, University of West Georgia, 1601 N. Maple Street, Carrollton, GA 30117, USA.

Eastern Economic Journal, 2014, vol. 40, issue 4, 583-603

Abstract: This paper investigates whether market makers rationally price out certain strategies at the expense of leaving other strategies profitable. We examine betting market outcomes in college football from over 14,000 games during 1985–2008. We find that favorites are statistically overpriced while home teams are statistically underpriced. Furthermore, we provide suggestive evidence for why this inefficiency persists: betting houses deliberately inflate the betting lines to account for previous strong performance against the spread, or the “hot hand.” Although eliminating the “hot hand” is rational since betting on “hot” teams is popular, tempering the “hot hand” results in profitable simple betting strategies.

Date: 2014
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