About Paradox of Skill in Sports Betting
Whether it’s the field of sports or finances, betting is always considered being a nice mix of luck and skill. The key to winning in the long term in this field isn’t so much about picking the right winners as it is about finding value in your bets and in registering consistent profits. Although betting tipsters may often promise you excellent strike rates, do you think they’re really able to deliver consistent results in the long term. The answer to that question lies in what’s popularly referred to as the Paradox of skill.
The manner in which your betting outcomes may vary from time to time, thus impacting your profits, is something which is a combination of both the variance in your luck as well as the variance in your skill. Although there is certain inherent randomness involved in sports outcomes, the general observation is that if your average assessment of the probability of a certain outcome (or its odds) is better compared to the odds published by a bookmaker, you’d be guaranteed positive results.
What do these odds represent?
The odds set by the bookmakers are majorly a reflection of what the market thinks about the chances of a certain outcome, excluding the margin influence. What’s this market? This market is nothing but all the sports bettors collectively expressing their opinions about the chances of the outcome, using their money.
Putting it in other words, betting odds are merely a representation of the weighted average opinion of the players who are engaged in predicting a certain contest, wherein the key to success lies in having better prediction skills than the opponents. If you’re that sort of sports bettor, you’ll always find value in your bets and make consistent profits in the long term. Sounds fairly easy?! Why do you think then finding this consistent value in your bets is so difficult? It’s because of the Paradox of skill.
Lessons learnt from baseball
Ted Williams, who used to be a famous MLB (Major League Baseball) player in the Boston Red Sox, had 0.406 as his batting average in the year 1941. Keeping in mind that the batting averages have hardly undergone any major changes (and fall anywhere between 0.25 and 0.28) ever since the professional baseball originated during the 1870s, Ted Williams average was a remarkable achievement, a feat that hasn’t been replicated since then.
However, as argued by many, if Ted were to be playing today, he may not have managed to enjoy that kind of average. This is owing to various improvements in the diet, fitness, training and general professionalism in the game. So, what happened? First of all, batting average is nothing more than a measure of the relative skill of a player, mostly to do with the respective batter and the pitcher on the other end.
With Major League Baseball having become far more professionalised, the batters have become highly skilled at hitting. However, the pitchers have also improved significantly in their pitching skills at the same time. Michael Mauboussin described it as a type of arms race in his work, “The Success Equation.” He mentioned that even though absolute skills undergo major improvements across the board, the relative skills stay more or less unchanged, on average.
Secondly, even though the overall skill levels of players have improved over a period of time, the difference between the worst and best pitchers and hitters has shrunk considerably. This can be better explained by imagining a human ability wall. Only a handful of players could approach that wall during the early years of MLB, and large majority of them were at a considerable distance from it. However, with the passage of time, better pitchers and hitters started replacing their weaker counterparts, and resultantly, the difference between the worst and best also narrowed down with time.
The more I work hard, the luckier I become
As the observed variance in the outcomes of sports events is majorly about the variance in luck and variance in skill, any decrease in the skill variance, keeping the luck variance the same, would get appropriately reflected in the variance observed in the batting average, quantified with the help of standard deviation.
The early years of the US professional baseball, that is 1870s, witnessed a standard deviation of 0.05 in the batting averages, implying that almost 2/3 of all the batting averages ranged from 0.2 to 0.3, with 95% falling between 0.15 and 0.35.
But, in the present times, this standard deviation has reduced by almost half of the original figure. As a result, it’s pretty uncommon to find extreme outliers. During the 19th century, it was alright to expect a batting average in the vicinity of 0.40, at least once in every 1000 hitters, that figure has risen to almost one in 1 million, in the present times.
Mauboussin also highlights the fact that the variance in luck assumes far greater importance in calculation of the outcomes, with any decrease in the variance and skill. So, if all the players get better in a certain aspect of the game, luck would play a very critical role in determining the eventual winner.
About betting tipsters
As in case of baseball, sports betting is also a relative skills contest between various layers and backers. The same holds true for sellers and buyers in the financial world. If a certain individual has better forecasting skills than the other (with regard to intrinsic value of the assets or game outcomes), he’d have ample potential of securing long-term positive expectations, once bad luck and good luck have cancelled out each other.
But, as per the Paradox of Skill, with more and more players adopting sophisticated methods of making future predictions, the range of their abilities will narrow down and chance or luck will have a major influence on the sports betting outcomes.
Mauboussin says while talking about the performance and results of institutional professional investors, that the more there is a similarity between everyone’s skill levels, the more you can expect the range of money managers’ excess returns to shrink. And that’s precisely what happens.
If you look at the time period falling between 1960 and 1997, you’ll observe that the standard deviation in the excess returns of Morningstar mutual funds fell down to 8% from 13%. All the big hitters disappeared from the scene, just like baseball, not because they weren’t equally skilled at predicting returns, but because of the fact that they were pitted against people who were more like themselves.
In a similar manner, the period between 2002 and 2007 witnessed major growth in the field of online sports betting, but with more and more punters finding ways of beating the marketplace, it became increasingly harder to do so, as skilled forecasters converged slowly towards the ‘wall of truth.’
Even though sports bettors may have become very sharp in the absolute terms, profitable returns have become extremely hard to come by. With the market efficiency increasing over a period of time, it is normal for the 0.4 hitters among the betting tipsters to disappear from the scene.