I’m rubbish at gambling. But it’s not my fault: I blame economics.

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Traditionally, January is the time of year when people think about making changes. Every New Year, I often think about whether I could do something other than make a living as an economist.

After a friend had a particularly lucky streak, I wondered whether it might be possible to live off National Lottery scratch card winnings. I’ve also thought about whether I could eke out an existence by winning competitions, after reading an article suggesting that many magazine competitions actually have fairly low entry rates. Apparently, a couple of hours a night is all it takes to have a steady stream of prizes coming through your letterbox.

Of course, these avenues were never going to be fruitful. This is why I now have an altogether more sensible idea of what my next career move should be: professional gambling.

I would love to be able to make money betting on sports exchanges. After all, this basically amounts to getting paid to watch sport all day, every day – and who wouldn’t want that?

The talk on the forums entices me into this mysterious world; regaled by stories from those who have decided to “settle for” a £25k profit from a particular football (soccer) or tennis match. Yet there seems to be an entry requirement to participate in forum life on Betfair (www.betfair.com): one has to have a big win to brag about. Big winners are ubiquitous, while big losers are largely absent. Presumably this is because they have sold their internet enabled devices to pay off gambling debts.

Or could there be another reason?

Could it be that it is genuinely is possible to make decent money from trading on betting exchanges like Betfair?

Economics, however, has other ideas. Apart from the occasional lucky win, I’m a rubbish gambler. And where do I place the blame for my shortcomings? I blame economics (plus a bit of psychology). There are two reasons for this. One is the Efficient Market Hypothesis (EMH) and the other is down to Prospect Theory. Rather odd bedfellows you may think, but stick with me on this one.

The EMH has various forms, but in brief its message is a simple one: an individual investor cannot consistently outperform financial markets. If everyone knew that the stock market was going to rise tomorrow, then investors would snap up shares straight away and the stock market would rise today instead. According to the EMH, people act in a rational and sensible way: anything that could reasonably be anticipated already has been, so markets instead respond only to genuinely unexpected news.

Seems reasonable, right?

The trouble with the EMH is that it’s a bit like sex with a supermodel: it sounds great in theory, but the reality can be much less fulfilling (so I’m told). The EMH’s main problem is that people can’t always be relied upon to take their emotions out of the equation and behave rationally, even when making cold-hearted business decisions. People can get overconfident or start to panic, which makes them overreact in a given situation. These human errors can lead to anomalies forming in a given market, with buyers taking little notice of underlying value – only to be undone when the market eventually corrects itself. Some people do stick to the rules though; and they are usually the ones who scoop up the profits when the bubble bursts.

Despite its dubious nature, the EMH does still seem like a good place to start when thinking about betting exchanges.

For a start, sport is a lot easier for most people to understand than finance: for many, it is a lifelong passion.

With so much easy to understand information out there, it ought to be much harder to beat the market on the betting exchanges. Take football for example. The quality and availability of statistics about the game has improved hugely in recent years. Even professional sports traders now admit (privately, of course) that any betting advantage that could have been gained from diligently pouring over the statistics to exploit any over or undervaluing of the markets, is being steadily eroded.

If a team’s star player gets injured the day before a game, the information hits the online newsstands instantly. The odds adjust, pretty much there and then. Unless you’re at the training ground and can swiftly get your money down before anyone else gets to hear about it, there’s no real betting advantage to be had.

But what about emotions, I hear you ask?

Sport is fuelled by passion, so surely there’s an opportunity to profit from those die-hard believers, who think their team will triumph no matter what?

Well, yes and no.

People can overestimate and under-estimate the odds of winning and losing a football match, especially when a goal has just been scored and a team goes into the lead. Whilst this violates a strict form of the EMH, the odds do come back into line fairly quickly as the market realizes its mistake. So the market does eventually react to this information and future swings in prices are never as large.

Even if you do discover a way to beat the market, it doesn’t last for long. Once the information is out there any advantage will eventually recede. This is why I tend not to like paying for betting strategies. I came across a betting strategy for tennis in this book and for a month, the world around me shrank steadily into the confines of the tennis exchanges, painstakingly glued to obscure matches in far-flung time zones, balancing Excel spreadsheets like spinning plates. I didn’t bet much money, but it was still more than I got back.

I’m not saying that it’s impossible to find an advantage on the betting exchanges. But in something as insanely popular as sport, it is going to be very well hidden. What is more, you’ll constantly have to look for new ones, because it won’t last for long.

So while the EMH is surely flawed, I still think I’m justified in heaping a big portion of the blame for my betting failures on it.

But the EMH can’t take all of the blame. I’m reserving a bit of that for Prospect Theory (PT).

For those who are new to it, PT was first developed in the late 1970’s by Daniel Kahneman and Amos Tversky – two psychologists – to help try and explain some of the quirks in human decision-making that the standard economic literature couldn’t account for. Just like in the case of the EMH, people didn’t always stick to the rules and they wanted to find out why.

PT has many elements, but the one I succumb to in particular is that of probability weighting. In PT, people don’t necessarily take the probability of an event occurring at face value. They look at the information, process and interpret it, resulting in the undervaluing of long probabilities and overvaluing of short ones. In other words, people think there is more chance of a long-shot coming off than their actually is (and vice versa for short odds).

This is why you’ll always get someone willing to bet on a long-short at the horse racing. It’s also what seduces people into risking huge sums of money on ridiculously short odds. “It’s free money!” they cry, like a sailor who has just spotted land on the horizon after weeks at sea. Strictly speaking, there are no such certainties in sport. And if you have to risk £100 just for the possibility of winning £5, is it worth the risk?

Thankfully, I don’t often find myself tangled up in the latter situation. I do, however, love an underdog. And that’s my own personal Achilles’ heel, which makes me human and also makes me depart from the EMH.

I don’t bet much, only £2 at a time. The trouble is, successive rounds without a win add up.

Yes, the away team is 2-0 down. Yes, they also happen to be bottom of the league. And yes, they are playing the league-leaders, who have fielded a full-strength side. But come on – wouldn’t it be amazing if the fought back to secure a hard-earned draw? Or even the win! I mean, stranger things have happened, right? Look at those odds… at that price, it has to be worth a couple of quid…


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