Thursday, December 02, 2004

Marc Cuban bets he can beat the bookies' betting line.

Marc Cuban -- who proved he's no dummy not only by making billions with his Internet start-up company but also by cashing in its stock for real money before the tech-stock bubble burst -- is opening a hedge fund that plans to make its money though sports betting. Cuban is now in the sports business as owner of the NBA's Dallas Mavericks...

Mr. Cuban outlined his thesis on his Web log, [sic, actually] on November 27. He said that in wagering on sports, “stupid money” invests primarily on emotion. Moreover, he said people who bet like this often do so with the expectation of minimal returns. “How efficient can a market be when the majority of investors expect to lose money?” he wrote.

Mr. Cuban wrote that the odds-makers in Las Vegas intentionally set the odds for sporting events to exploit this sentiment, seeking to attract so-called “stupid money” to skew the betting. Right before the contest, the “smart money”— sensing an inefficiency—places its wagers. More often than not, they win.

The people who have the ability to exploit this market inefficiency — Mr. Cuban said he sees no difference between gambling and investing— are the ones he wants to hire.

“I will find the best and the brightest with a confirmable track record and hire them,” he wrote, without specifying whether their backgrounds will be in sports or finance. [NY Sun]
OK, this will be an interesting attempt. Cuban will be betting, literally, that the sports betting market is inefficient because of all the "stupid money" in it. Yet...

#1) A market awash in "stupid money" can set prices very efficiently so long as a minority of participants in it are smart and use their smarts to bid prices to efficient levels. This jibes quite well with empirical studies showing how hard it is to systematically beat both the bookies' spreads and the financial markets, even though there is surely no shortage of "stupid money" in either arena.

#2) Cuban in his post on his new hedge fund actually describes the sports betting market as operating just as in #1). More than that, he describes it as being more efficient than the financial markets, offering better information and other advantages to participants...

...this suggests [in sports betting] the smart money is better than just good. It’s very good...

When you think about betting on sports, there really is far better information about your local sports team than there is about any local business in your market. The local papers cover the team every day. The local TV station gives a report about every game. There are radio stations who cover them for hours at a time. That’s far more information than you get about Tyco or Computer Associates or NFI.

In sports, when someone does something wrong, they pretty much tell you the next day or two. Someone suspended — You know it. Someone hurt — They report it, and do a better job of policing that than any industry watchgroup.

And stats? my goodness. There is no comparison. You can tape everything and create your own stats, which I’m sure every “smart money” gambler does. There are public play-by-plays of every game. There are websites that analyze every which way from sunday every action and inaction of every player in the game.

There also is no such thing as insider information either. Player and team reps can’t talk to known gamblers, but do they really need to?

Reporters are there after every practice to interview the players and coaches. They ask the same questions that every gambler wants to know, if only so they know who to pick for their fantasy teams. They also get to see and report on who is there and who isn’t and who is limping and who isn’t.

That’s far better than we get from public companies...
OK, maybe it is -- but if so much superior information really is available to everybody in the sports betting market than in the financial markets, then how can it be easier to systematically beat the market in the former? (Is he implying there is some sort of deficiency of "stupid money" in the financial markets??)

It seems to me that Cuban is betting on the existence of a really singular market failure -- that in the whole wide world of Nevada gaming, sports books and "smart money" gambling, nobody else has thought of this before he has. Because if others already have, and are already competing with each other to take advantage of the stupid money, then they've already bid away the prospect of excessive profits.

Well, it will be an interesting attempt to watch.