Exploiting psychological flaws for betting profit

In October 2014 Pinnacle’s Head of Sportsbook contributed to the article “Three Must-Read Books for Bettors”, recommending Nassim Nicholas Taleb’s Fooled By Randomness, Daniel Kahneman’s Thinking, Fast and Slow, and... Categories: Trading Psychology

In October 2014 Pinnacle’s Head of Sportsbook contributed to the article “Three Must-Read Books for Bettors”, recommending Nassim Nicholas Taleb’s Fooled By Randomness, Daniel Kahneman’s Thinking, Fast and Slow, and Nate Silver’s The Signal and the Noise. While you might not agree with this selection, (I would substitute Silver’s book for another Taleb classic: The Black Swan), it is notable that none of these books deal explicitly with sports betting. Instead, they deal with behavioural psychology, the innate flaws in our thinking, and man’s inability to forecast the future while often being confident in doing so. So why should these books be so important to successful sports betting? The answer is that by understanding natural human psychological biases we can both control them in ourselves and exploit them in others. In this article I will give examples of how natural flaws in our thinking affect betting patterns and how these flaws can be exploited for profit.

Example 1: Loss Aversion and How Not to Eat Like a Chicken.

Humans don’t like to lose. In fact, the pain of a loss is greater than the pleasure found in an equivalent win. For this reason many bettors prefer to win bets rather than to win money – they back poorly-priced favourites to gain a high win rate but poor return. It is easy to win 60% of your bets while losing money. To coin a phrase, they eat like a chicken and dump like an elephant.

Exploiting Loss Aversion: If you are mentally prepared to lose many more bets than you win while knowing that your winning bets will more than cover your losses then this can lead to excellent yields and strong profits. In practice, this means backing an outcome the bookmakers consider unlikely, which will often be mispriced in your favour.

Example 2: Shock Results Are No Surprise

How often do you hear an over-excited commentator proclaiming a “huge shock” at full time on Saturday afternoon? Pretty often in my experience. The fact is that rare events happen more regularly than we think, and this includes surprising football results.

Exploiting the Rare Event: This links to the first example – backing unlikely outcomes (or laying strong favourites) is often profitable. I personally look for odds of 7.0 upwards to analyse for mispricing. At odds of 15.0 upwards in football markets liquidity can be a problem.

Example 3: Confirmation Bias – “I knew Celtic would beat Motherwell”

As humans we look for evidence to support our beliefs while often forgetting to search for indications that we might be wrong. When Celtic scored first against Motherwell at home how many Celtic backers saw this as confirmation that their team was assured of victory (the match ended 1-2 for a “shock” Motherwell win). The effect of this bias is often that favourites already too short on price before the confirming event become even more mispriced in-play. The same effect pushes the unlikely events (draw, away win in this case) into serious value territory.

Exploiting the Bias: After a strong favourite takes the lead check the odds for the draw and opponent win; there will often be opportunities for those willing to lose more often than they win but to win big when the rare event happens.

I use all the above ideas in my football betting and employ an algorithm to identify mispricing, usually finding opportunities to back underdog wins or draws at odds of 7.0 and above. Patience, understanding and commitment are required but the returns can be significant. For those wanting to improve their betting and overall decision making I add my recommendation to read Taleb and Kahneman – they might just change your life as well as your account balance.

About David Tampin

David has a degree in Mathematics and has been sports betting for over 20 years. After a career in the army David completed his MBA in Sydney and was first introduced to the area of human heuristics and biases. David combines behavioural psychology with mathematical modelling to identify mispricing and has developed a successful strategy over the last five years.
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