Soccer Betting

This is a real example that happened during Euro 2004. Now World Cup 2006 is coming up, so it strikes my mind again.

A friend of mine was betting on which team would win Euro 2004. He thought I'm interested in betting too (but he was wrong - I only enjoy watching soccer, but I hate soccer betting). One day he told me why he ended up putting his money on Germany.

"I think France will win. But France's odds are only 4:1 (meaning that the dealer would give you $4 for every $1 you bet, if France won), while Germany gives 15:1. So I'm betting on Germany."

At the first glance, this statement doesn't make sense at all. If you really think France will win, there is no way that you put your money on any team other than France. It doesn't matter even if Germany gives 1000:1 - if France wins, this is never realized.

So I am assuming that my friend has a subjective probability distribution, i.e. he doesn't know which team will win for sure, but his soccer knowledge enables him to assign winning probability to the teams. Suppose he is risk-neutral (meaning that he is indifferent between 1. $5 for sure and 2. a bet with 50% getting $10 and 50% getting nothing). In making his argument, he is likely to be thinking that France's chance of winning is lower than 1/4 and Germany's chance of winning is greater than 1/15. For example, if he thinks Germany has 10% (which is greater than 1/15) chance in winning Euro 2004, then he will benefit in the long run: suppose there are 100 of these events and each time he puts up $1. If he is right, approximately he will win 10 times, and the dealer is giving him 10*$15 = $150, which is greater than his $100 investment.

There is still a problem here. If the soccer betting market is efficient, the odds should reflect market expectation (this is the definition of "efficiency" in the finance literature); but part of my friend's expectation (France's chance of winning is lower than 1/4) is not reflected in the dealer's odds. (Note that, however, his expectation on Germany is counted, since the dealer will lower Germany's payout when he bets on it.) This is a potential explanation of why there's a huge illegal soccer betting market. Suppose my friend is a soccer expert and he is sure that France's chance of winning is only 20% (which is lower than the odds in the market, 1/4), he cannot make a profit by betting on France, but he can make profit by betting against France and making himself a dealer (which is illegal). If he accepts other people's bet at 1/4 and France wins only 1 out of every 5 times, then among 100 of these events, he collects $100 and pays only 20*$4 = $80.

To prevent illegal soccer betting, the most effective way is to make these activities not profitable. In fact, there are many betting websites that allow you to be on either side of the bet, i.e. you can be on the side that pays people when something happens, and you are effectively a dealer. (However, this is not legal in some sports and in some countries yet.) If everyone can be a dealer, he can bet whenever he doesn't agree with the market odds (My friend can bet against France in this case, and the market will be more efficient as his expectation is counted). There will be no economic justification of engaging in illegal betting markets.