Wednesday, March 05, 2008

Pete Rose and betting market efficiency

Courtesy of Zubin Jelveh's blog, a link to a short paper analyzing Pete Rose's 1989 bets (from the Dowd Report). It's called "Market Efficiency in the Baseball Betting Market: The Case of Pete Rose," by Douglas Coate.

The paper is only two pages long; it lists Rose's bets, both on the Reds and on other teams, from April 8 to May 12, 1987. Rose placed 190 bets, typically of $2,000 each. He lost $4,200 on the Reds (27 bets), $36,000 on other NL teams (72 bets), and $7,000 on his AL wagers (89 bets), for total losses of $47,200. (My numbers add up to 188 bets instead of 190 because I probably counted them wrong from the table.)

Coate describes Rose's bookie's odds as even money, with a 10% fee payable on losses. This is equivalent to 10:11 odds. He says the losses "include about $20,000 to $25,000 in transaction fees," so even if Rose were able to have gotten even money, he still would have lost.

From this, Coate argues that these results are "consistent with an informational efficient [betting] market," and says that Rose's expertise "was not an advantage."

I'd agree that it's interesting that Rose didn't win, and I do think the betting market is very efficient, but I think that looking at Rose's bets is a very weak way of testing for strong market efficiency.

First, why presume Rose is an expert? It's pretty well established that most professional baseball managers work from their gut, not from science or empirical evidence. Rose may have inside information, but professional gamblers have analyzed the market, and, in some sense, have a lot more information impacting their bets than Rose does.

Second, during the period in question, Rose bet on every Reds game except one. It's not very plausible to assume that he would have had inside information impacting every game, would it? Even if he did, somehow, know that over the entire month, the Reds were better than could be predicted from publicly-available information, that would have become apparent as they started winning games and the odds adjusted.

Third, any advantage you'd gain by having inside information isn't worth that much. For instance, suppose Rose knew that Eric Davis would be out of the lineup. If Davis was 50 runs better than his replacement over a season, that's 0.3 runs over a game. That's 0.03 wins, or one extra win every 33 games. Knowing about Davis's absence is a fairly big piece of insider information, and even if Rose had one of those every game he bet on, he'd only win one extra game out of 33 (perhaps going 17-15 with a rainout instead of 16-16).

Suppose, on average, Rose had this kind of insider information one out of every three games (which still seems like a lot, especially considering he bet on so many different teams). In that case, instead of going 95-95, he'd be expected to go 97-93. Rose's results aren't significantly different from either of those numbers, so if you say there's no evidence that Rose could beat the market, you have to also admit that there's no evidence that he didn't have insider information and *could* beat the market. Rose's bets just aren't a powerful enough test to tell us much about market efficiency.

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At Wednesday, March 05, 2008 5:19:00 PM, Blogger Don Coffin said...

One thing that needs to be factored in the the use of insider information to decide whether to bet. Given that Rose almost certainly always bet on the Reds to win, then we may infer (but we might be wrong) that when he did not bet on the Reds he thought they were likely to lose. So we have a one-sided set of bets.

Counting the vig, his losses on Reds games were about $155 per bet; on other NL teams, about $500 per bet, and on AL teams about $79 per bet.

So the evidence is, in fact, mixed. He did worst betting on other NL teams, middling betting on the Reds and least bad betting on AL teams. Given that one would assume his "insider" status (high to low) would probably be ranked Reds, other NL, AL, I see no strong evidence that insider information helped, and some that emotional betting (always on the Reds to win) probably led to losses.

I read something earlier today (and can't find it now) which concluded that there is not much evidence in this study one way or the other. I'd agree with that.

At Wednesday, March 05, 2008 6:27:00 PM, Blogger Phil Birnbaum said...

That's an interesting question: why didn't Rose bet on the April 25 game? It was against the Expos, Browning vs. Dennis Martinez, and the Reds won 6-1.

My first thought was, maybe he didn't get to the phone? But he bet on other games that day.

However, he bet ONLY on the Reds game the day before, no other games. 4/24 is the only day in the study he didn't bet on any non-Reds games.

So: maybe he bet on the Reds games a day in advance, but for the other games he waited until the same day? Then, if he didn't have an opportunity to get to the phone on April 24, that would explain everything.

Except: if that were the case, why wouldn't he just catch up by betting on the Reds the afternoon of April 25, at the same time he bet on Atlanta, Detroit, Milwaukee, and the Yankees?

Any ideas out there? The facts that we're trying to explain, are:

1. Rose bet on every Reds game except 4/25,

2. Rose bet on other teams every day except 4/24.

Just seems like too much of a coincidence to not have an explanation.

At Thursday, March 06, 2008 7:10:00 AM, Anonymous Anonymous said...

I have not read the article, just your comments on it, but it seems that the author is making an assumption in regards to Rose's betting behavior, namely, that it was rational. If Rose was betting that the Reds would win every game, he was acting more like a compulsive bettor than a rational one. It suggests that Rose was in the grips of a gambling addiction. As such, more than anything else, he was probably into the excitement generated by the act of betting. Winning and losing would have been secondary. If that's the case, and I believe that it was from everything I've read, there's no point in trying to evaluate how efficient he was in his betting activity.

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